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In association with Hedge Fund Intelligence |
Market events this past month – from the US government stepping in to support Fannie Mae and Freddie Mac to the filing for bankruptcy of Lehman Brothers and then the last-ditch bail-out of AIG – have come so thick and fast they have no doubt left many outside the hedge fund world reeling with bewilderment. But within hedge fund land, there already was an acute focus on just how well – or badly – hedge funds individually and collectively have done to cope with the market turmoil. Everybody knows that the way they are seen to perform through this highly treacherous period is likely to be critical for their prospects in what seems certain to be a much-changed financial world.
After the first half of the year, I felt that on balance hedge funds had generally done not too bad a job of coping with challenging market conditions. Some, of course had big problems – such as Peloton Partners, which imploded so spectacularly in February. And there was a lot of dispersion in the returns being delivered by individual funds – with many nursing double-digit losses.
Nevertheless, the median returns for the first half were roughly flat – not great performance, admittedly, but much better than equity markets, which were down 10% to 20%, and most other asset classes. This included some strong performance from strategy areas such as CTAs and other commodity players, macro funds and volatility strategies – which was balancing out losses in other areas. In Europe, three of the biggest players by assets – the AHL-managed futures programme operated by Man Group, the flagship Brevan Howard macro strategy, and David Harding’s Winton Futures programme – were all up strongly in the first half, and are still well into positive territory for the year to date.
There were some other surprising areas of resilience. UK-focused long/short equity funds, as measured by the EuroHedge European Long/Short GBP index, were up an average of more than 4% in the first half – with many managers successfully playing a short financials and/or a long mining and commodities theme.
In July and August, however, the tortures of the credit crisis were ratcheted up a couple of further notches – with sudden reversals of previous trends in both financials and commodities hitting many funds that had previously done well this year, and relatively little in the way of compensating gains elsewhere. By the end of August, the HedgeFund Intelligence Global Composite of performance had slipped to minus 1.37% for the year to date. But once again the overall median disguised a massive dispersion between different strategies and funds. If it hadn’t been for the fact that CTAs – often derided in previous years as poor relations of “real” hedge funds – were up nearly 8%, the Composite would have looked much worse.
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Strategies that focus primarily |
While global long/short equity players are down an average of nearly 5% in the US and more than 6% in Europe this year, the focus of the carnage is in Asian and emerging market equities. For some time, sceptics had been warning that these funds were just “long-only players in drag” – and, sadly, this appears to have been true of all too many of them. The difficulty, expense and at times sheer impossibility of hedging in some of these markets have no doubt also been factors in average losses of nearly 16% so far this year for emerging market equity funds, and even greater average losses for equity funds focusing on Asia excluding Japan, particularly in India and China. Some will no doubt already be saying that this is the death-knell for hedge funds in those markets – and there was indeed a drop in assets for the first time on record in Asia-Pacific hedge funds during the first half of 2008 – of about 10% from about $192 billion in January to less than $176 billion by July, according to the latest AsiaHedge survey.
However, we shouldn’t draw too many sweeping conclusions too fast. For one thing, there are still quite a few funds that have continued to deliver excellent positive returns in Asia over the past year – from groups such as Artradis Fund Management of Singapore, Coupland Cardiff Asset Management and the Gartmore Japan team in Tokyo – which are all among a stronger than ever field of contenders vying for recognition at the AsiaHedge Awards in Hong Kong this month.
There will also be other managers who have perhaps not done quite so well through this crisis but who can still survive – and will have learnt a lot from the white-knuckle ride of the past year.
It seems to me, however, that some structural changes are likely to come in the make-up of the hedge fund market. Strategies that focus primarily on more-liquid, heavily traded instruments – such as most managed futures, macro and equity players do – must surely come back even more into vogue. And many strategies that focus on less-liquid instruments and/or require heavy degrees of leverage must surely get squeezed in an era when banks are scrambling for enough capital to keep themselves alive – and the availability of finance is hence more difficult and more expensive.
That doesn’t mean to say there won’t be some very attractive opportunities in some less-liquid areas of credit and distressed debt instruments. But investors should be well aware that, with the levels of volatility we have now, managers simply should not need any leverage to exploit them.
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In association with Hedge Fund Intelligence |
