The hedge fund industry will grow in 2010 with risk management continuing to be the key to success and macro, long/short equity and long/short credit will be the best performing hedge fund strategies in 2010, according to Morten Spenner (pictured), CEO at fund of hedge funds manager International Asset Management (IAM), and Andrew Gibson, Head of Asset Allocation.
Stabilisation of the industry: Outflows have subsided greatly, inflows have returned and a large core set of managers have demonstrated their ability to remain successful. Allocations to hedge funds will continue to grow in 2010 in response to the uncertain macro-economic environment.
Ensuring the right risk-reward balance: Performance in 2009 has been strong, albeit at a significantly reduced risk-level. There is less need for leverage, a strong bias towards liquid positions and the risk-reward balance has been particularly attractive over the past six months.
Risk management a core focus:Risk management tools are being further honed and managers are particularly sensitive to preserving capital.
Being transparent with clients:All market participants are recognising the need to establish stronger relationships with clients and the need to proactively share information on exposures.
Enhancing operational standards: Hedge funds and fund of hedge funds will continue to invest in people, processes and infrastructure in 2010. They have had to place increasingly more emphasis on adapting their business models to respond to a more discerning institutionally focused client base.
Reacting to regulatory initiatives:Hedge funds in general are in favour of commercially sound regulation and will continue to be committed to supporting new legislative initiatives and/or new product launches.
Investment Outlook for 2010:
The unprecedented dislocation in markets will continue to provide opportunities for nimble, intellectually-strong players.
- The uncertainty between a deflationary or an inflationary world will continue.
- Governmental monetary and fiscal policy shifts will greatly influence markets.
- Underlying growth drivers and the pace of growth will vary significantly.
- Individual companies will continue their fight for both survival and market share, and valuation anomalies will allow for value extraction.
Hedge fund strategies for 2010:
Macro managers will be able to extract value from fixed income, FX, and commodity themes based on timing, geographical biases, and growth divergences.
Long/short equity and long/short credit managers will benefit from fundamental analysis as well as trading skills in an environment that will allow for positive attribution on both the long and the short side.
In all three strategies, macro, long/short equity and long/short credit, we see no reasons for deviating from liquid, tradable portfolios that enable strong risk frameworks.
