Randal Goldsmith, Fund Services lead analyst, Standard and Poor

Falling correlation should help long/short equity strategies, say FoHF managers

Long/short equity strategies look set to benefit from decreasing levels of correlation between securities, according to funds-of-hedge-fund (FOHF) managers interviewed by Standard & Poor’s Fund Services in its latest sector update.

 

“As correlation falls, FOHF managers are anticipating that underlying hedge fund managers will be able to generate more alpha through dispersion in industries and names,” says S&P Fund Services lead analyst, Randal Goldsmith. There was a strong recovery of long/short equity hedge fund managers in September last year, mainly due to the strength of underlying equity markets. In fact, for many of the more directional funds, it proved to be the best month in the past five years.

“Cameron Khartounis, who manages S&P AA rated Acropolis Multi-Strategy Fund, thinks correlations between securities should reduce as the market becomes more confident in the economic backdrop and focuses more on fundamentals,” notes Goldsmith. Long/short equity hedge is the second-biggest allocation in the portfolio, at 32%, and returned 6%. Permal is also optimistic about the outlook for the strategy. High correlation among stocks has been a difficult background, the team points out, reaching its highest level in the past 20 years in July 2010. However, correlation had fallen to its long-term average by the end of the year.

FOHF finished 2010 strongly, returning about 3.5% in the fourth quarter to give a full year return of 5%, according to HFN. Returns had disappointed until September, but the recovery of the equity markets from August onwards benefited equity hedge fund strategies in the final quarter of the year. It was the best September for equities since 1997, as measured by returns on the FTSE All-Share index. Also, strong trends in commodities contributed to a strong fourth quarter by CTAs, which returned an average 6.4%, according to HFN figures.

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