January was a relatively successful month across strategies for the stable of funds managed by HSBC Alternative Investments Limited (HAIL), although the mood was more one of cautious optimism during a breakfast presentation hosted on Thursday 2 February by Peter Rigg (pictured), Global Head of the HSBC Alternative Investment Group, and William Benjamin, Head of European Research.
The presentation – Hedge Fund Outlook 2012 – outlined HAIL’s current thinking on investment opportunities this year given the market turbulence of 2011 which saw global hedge funds incur some hefty losses: the average fund was down 5 per cent according to Hedge Fund Research.
“January has seen a good start across strategies – global macro, long/short equity, credit managers: all posted positive returns,” commented Benjamin.
HAIL offers investors a range of investment solutions which investors can allocate into either through co-mingled Funds of Hedge Funds or bespoke, segregated mandates. Asset flows are roughly spilt 50/50 at present, and although more institutions are increasing their hedge fund allocations, many still favour the FoHF model, principally due to a lack of resources.
Rigg said that sector specialists in HAIL’s flagship HSBC GH Fund, which uses a multi-strategy approach, all delivered positive returns last year, in particular those covering the healthcare, energy & shipping and media and telecommunications (TMT) sector.
Managers running directional trading strategies (e.g. directional macro, CTAs) also fared well, but Rigg was quick to point out that, in general, 2011 was tough for a lot of managers because it was very much a macro-driven risk on-risk off environment. “When the Risk On – Risk Off Index (developed by HSBC Global Research) increases, as it did in 2011, everything moves in lockstep and this makes it difficult for managers to make money, particularly in areas such as relative value,” said Rigg.
The strongest contributor to performance in the flagship fund was macro according to Benjamin who said:
“Macro funds had performance that ranged from the single digit level to the mid teens. None of our managers were down in 2011. As for long/short equity funds, historically our exposure has been as high as 50 per cent but currently it’s below 30 per cent.”
Aside from its flagship HSBC GH Fund, HAIL’s other fund products include the likes of HSBC Trading AdvantEdge Fund, HSBC Multi-Adviser Arbitrage Fund, HSBC Credit Market Opportunities Fund and HSBC Next Generation Fund – the latter focusing on a portfolio of 10 to 15 new managers who are expected to become future stars of the industry.
Rigg said that, generally speaking, fund managers remain quite defensively positioned as risk sentiment continues to oscillate and that HAIL believes one of two scenarios will likely play out in 2012. Scenario 1 reflects a continuation of 2011: that is, on-going macro fears, low growth, risk on-risk off sentiment. Scenario 2 is more optimistic and based on a resolution (of sorts) of the Eurozone crisis, which could help improve market stability and reduce cross-asset correlations.
Quite simply, until the RORO Index shows signs of falling, Rigg does not envisage a transition from Scenario 1 to Scenario 2.
“We’re currently positioned for Scenario 1 but we can move quickly into Scenario 2 when required,” said Rigg, pointing out that selecting best-in-class managers that can react dynamically, should market conditions improve and equity market correlations reduce, is precisely the value-add that’s crucial to HAIL’s clients.
Rigg continued: “Presently we’re underweight long/short equity but we favour nimble managers and sector specialists within the strategy. We’re overweight directional macro strategies and Managed Futures and remain neutral on event-driven strategies although we favour managers running hard-catalyst funds.” In the credit space, preference is given to managers running balanced portfolios.
One interesting development was that in 2H11, HAIL started to rotate into new hedge funds including Solaise Systematic Fund, a global managed futures fund that launched July 2011, and DSAM Long/Short Equity Fund, which launched in London last November. These funds are part of an 8-manager strong portfolio in the HSBC Next Generation Fund. Currently, around USD200million is invested in the portfolio. Other managers allocated to in the fund include: Apson, Avantium, OVS and Harbor Bridge. “We’re targeting USD500million invested across 10 managers and so far we’re on track,” said Rigg, adding that the benefit of being a Day 1 investor was greater flexibility on fees, which in turn can then be passed on to HAIL investors.
As for what strategy changes one could expect to see in a transition to the second scenario, they would by their nature be reflective of a return to fundamentals. With that in mind, Rigg said that rotation would move back into those managers running fundamental-based long/short equity funds. “We would also look to reduce our overweight position in directional macro and consider more relative value macro strategies in addition to activist and special situation strategies, which are beginning to perform well.”
“This is where we’re looking, but of course going forward things can change. Managing the transition from Scenario 1 to Scenario 2 will be straightforward, we just don’t know when that will be, timing wise,” added Rigg.
When the signs are there, however, the emphasis will be on selecting the best funds, as already mentioned, with Rigg confirming that two thirds of the selection process is based on the managers themselves, the other third on strategy, roughly speaking.
This is what FoHFs are expected to do – leveraging their expertise in manager selection. And according to Benjamin, emerging markets represent a lot of encouraging opportunities, particularly in Asia (and to a lesser extent Latin America).
“New funds being launched in Asia are far more robust – things have changed a lot over the last two to three years in terms of fund quality and infrastructure,” noted Benjamin.
Right now, HAIL is playing a patient game, waiting for the tell tale sign of cross-asset de-correlation before considering Scenario 2.
