Intech Investment Consulting has given hedge fund managers a much-needed boost, with the suggestion that the outlook is the best in years because of less capital competing for an “unusually wide range of opportunities”.
In a client report on hedge funds, Michael Coop, Intech’s head of alternative investments, says the transition from fiscal stimulus policies to those more consistent with economic recovery offer macro hedge fund managers opportunities to exploit large changes in interest rates and bond markets.
Similarly, unwinding of extreme leverage by companies and investment funds is forcing more catalyst events such as refinancing, mergers, asset sales and bankruptcies which can be exploited by equity and event-driven managers.
There is less competition among hedge funds themselves, with an estimated US$300 billion having been withdrawn in 2008 and 2009 and the scaling back of proprietary trading by investment banks.
Hedge funds also look relatively attractive now that share and credit markets are no longer cheap, the report says.
“Having a hedge fund manager that can add value from shorting individual companies and manage overall sharemarket exposure now looks more attractive relative to long-only managers,” Coop said.
He believed that a repeat of the factors which caused most hedge funds to have negative returns in the final quarter of 2008 would be unlikely given the fall in investor hedge fund exposure and the fact that investment banks were starting to grow their balance sheets.
Coop said most of the losses in 2008 were confined to the months of September and October and could be attributed largely to three one-off factors: massive redemptions; the withdrawal of debt financing; and short-selling bans.
These factors were abating by January 2009 and hedge funds were subsequently able to preserve capital during the sell-off in equities which occurred in the first two months of that year.
But Coop recommended that super funds tailor their hedge fund strategy by combining dedicated internal expertise with customised research and external expertise.
To get the best results from hedge funds, investors should trade off liquidity to get access to a wider talent pool, more opportunities and, ultimately, higher returns or more diversification.
He said funds should also allocate enough to hedge funds to make a difference to total portfolio returns.