Building on decent absolute performance in the second half of 2009, funds of hedge funds managers have continued to improve liquidity in portfolios, maintaining significant allocations to long/short equity hedge and global macro, according to the latest review published by Standard & Poor’s Fund Services.
“FOHFs managers have taken a variety of steps to improve liquidity in portfolios, including investing with hedge fund managers by way of managed accounts, restricting investment to the more liquid strategies, and setting up new funds of funds that invest in Ucits III-regulated products,” says S&P Fund Services lead analyst Randal Goldsmith.
Reacting to these changes in investment approach, and acknowledging the important role these new vehicles play for investors in the current low-interest rates environment, S&P Fund Services has created a new fund group within its FOHFs’ Directory, containing five Ucits III-regulated funds of funds, and a UK-authorised fund of alternative investment funds.
Looking forward, despite a lack of strong consensus from FOHFs managers about strategies, there was some agreement that low-beta equity hedge could do well.
“FOHFs managers we spoke to have mixed views, but a number think that low-beta equity hedge fund managers should do well,” says Goldsmith. “Permal’s Robert Kaplan makes the point that we have had two years of stock returns driven almost entirely by market direction, during which there has been limited differentiation by stock-specific issues. This leaves good opportunities for stockpickers, in his opinion.”
This year, for the first time, S&P Fund Services has reviewed all funds at the same time to better compare FOHF performance records. It continues to look at FOHFs against their own objectives, but 2008 threw many off course, and so it has been necessary to take a closer look at a FOHF’s performance relative to other funds with a similar approach and strategy mix.
“Although liquidity constraints on FOHFs have eased, they have not been cleared up entirely and S&P Fund Services is not rating those funds where side pockets or redeeming share classes amount to over 20 per cent of NAV,” adds Goldsmith.
