As the equity markets have entered a technical bear market, hedge fund managers have successfully protected capital in a severe and volatile downturn thanks to hedging and adjustment of gr
As the equity markets have entered a technical bear market, hedge fund managers have successfully protected capital in a severe and volatile downturn thanks to hedging and adjustment of gross and net portfolio exposures with respect to market movements, according to index provider Hennessee Group.
Hennessee, which is also an adviser to hedge fund investors, says that while most global equity markets have declined more than 20 per cent from their peak in October last year, the Hennessee Long/Short Equity Index has gained 0.15 per cent over the same period.
The firm says its latest research data highlights a trend for hedge fund managers to reduce their risk appetite and reallocate investments to cash and less risky assets in response to an environment of increasing volatility and uncertainty.
At 176 per cent, the gross exposure of the average hedge fund in mid-2007 was at its highest level since before 2003. Hennessee Group’s says the average net exposure of long/short equity hedge funds has decreased by 16 per cent over the past year, from 52 per cent at the end of June 2007 to 36 per cent 12 months later.
The tightening of net exposure was largely due to managers’ trimming of margin and long portfolios, as the average long portfolio declined 21 per cent from 114 per cent in mid-2007 to 92 per cent in June this year, while short positions were reduced by only 5 per cent from 62 per cent to 57 per cent, reflecting negative market bias on the part of managers.
‘Hedge funds have manoeuvred long, short, and cash investments to minimise losses and protect capital in a particularly challenging bear market,’ says Hennessee Group managing principal Charles Gradante. ‘We continue to see evidence of alpha generation as a result of portfolio construction and adjustments that have insulated hedge funds from the current market downturn.’
Hennessee says hedge fund managers appear to have gradually increased both net and gross exposures from the first quarter of 2003 up to the middle of last year in order to participate in the equity bull market run, peaking at the end of the second quarter just before the S&P 500’s peak for the year. As the broad market began to decline amid as credit turmoil took hold, net and gross exposure levels also decreased.
‘Money managers are currently less willing to choose a market direction and instead prefer to maintain cash positions, with the lowest net exposure since 2003, in preparation for improved investment opportunities,’ Gradante says.
The Hennessee Hedge Fund Indices are calculated from performance data reported to the Hennessee Group by a diversified group of more than 1,000 hedge funds. The Hennessee Hedge Fund Index is an equally-weighted net of fees and unaudited average of the funds in the indices, derived from the group’s database of more than 3,500 hedge funds.
