It was a gruesome first quarter for many hedge funds. On average, hedge funds globally dropped by more than 1.2% in March, to leave them down by an estimated average of 1.66% for Q1 as a whole, according to the HedgeFund Intelligence Global Index. But there were plenty of areas where the falls were much greater than the average.
Hedge funds in Asia were particularly hard hit, with the average fund dropping 2.52% in March to leave the AsiaHedge Composite down an estimated 5.36% for the first quarter. This was still significantly better than the Asia-Pacific equity markets – with the MSCI Pacific Free Net index dropping 9.57% over the same period. But it was obviously not a great performance – even after what was a very good year for Asia-Pac funds in 2007. And there were some particularly weak returns in Q1 among the single-country funds in India, China and Australia; in all those places, average long/short funds are now under water by more than double-digit amounts for the year to date.
In Europe, the picture overall is a little rosier – with strong returns from many macro and managed futures funds helping to boost the EuroHedge Composite, leaving it down by only 1.02% overall for Q1.
But the strong returns from some strategy sectors, and particularly from the commodity players, cannot disguise what has been a particularly disappointing spell for the core community of managers in Europe who ply European long/short equity strategies. European long/short managers dropped by an average of about 1.2% in March, to leave them down by almost 3.5% in euro terms over the first quarter. On average, this was also better than the relevant equity markets in Europe – though there was a huge degree of dispersion among the individual fund returns, with a lot of bigger and better-known funds down by 7% or more.
Following the multiple shocks of recent weeks – from the sudden collapse of Peloton and last-ditch rescue of Bear Stearns to the continuing global financial crisis, resurgent inflation, and soaring food and energy prices – there was understandably a rather serious mood to the big annual EuroHedge Summit event held in Paris in April.
The event, however, was more heavily attended than ever. More than 1,000 delegates heard many of the industry’s leading names such as Philippe Jabre – manager of the $3 billion Jabre Capital Multi-Strategy fund (the biggest new hedge fund in the world last year) – give their thoughts on the challenging environment.
"We are not at the end of this period in the markets and we are not at the beginning," Jabre told delegates. "We are in the middle and no one knows how to act, or how long it will last. But you cannot afford to be wrong. For a hedge fund manager, if you lose 10% in performance, you will lose 20% of your assets – that formula is just a fact."
Jabre also had some views on how to avoid some of the dangers in present markets. "Somebody said to me the other day that leverage is like a drug: once you have taken it, you can’t live without it," he said. "Using leverage in liquid assets is fine. But leverage in illiquid assets takes you to hell."
Other leading players had similar thoughts, including Bernard Oppetit, CIO of the $4 billion Centaurus group, who agreed that the present climate was particularly uncertain and perilous. "We are in the middle of a very severe crisis for the hedge fund industry, and for markets in general. Like everyone, we are worried about what’s ahead and it is very important to have investors who have been with us for a long time, and who understand what we do."
He added: "There is a deep Darwinian process in this industry and we are in a phase of creative destruction. For the short term, at least, survival is the name of the game."
There were, however, also some positive thoughts on how best to survive in the current environment. "A robust infrastructure is even more important in challenging times," said Paul Ruddock, co-founder of Lansdowne Partners, which is now one of the very biggest European hedge fund groups, with assets of about $17 billion. "You have to be as transparent with your investors as possible so that, if you lose money, investors can understand why and accept it. Losing money is never a good thing. But there are acceptable and unacceptable ways of losing money."
And there were some specific thoughts not only on how to survive but also how to exploit opportunities – and particularly on the short side – from keynote speaker Paul Findley, manager of the $1 billion Threadneedle Crescendo UK long/short equity fund: "Be clear – sort out the stocks you think are going up and the ones you think are going down. Panic early – don’t start panicking when it’s too late to do anything about it. And be right."