After a challenging 2008, when unprecedented market sell-offs, a ban on short selling and large capital redemptions led to a 19.1 per cent decline in the hedge fund industry, it appears
After a challenging 2008, when unprecedented market sell-offs, a ban on short selling and large capital redemptions led to a 19.1 per cent decline in the hedge fund industry, it appears that hedge funds have managed to reposition themselves in the first half of 2009, a report from Credit Suisse Tremont shows.
The Credit Suisse Tremont Hedge Fund Index posted returns of 7.2 per cent through 30 June. It has posted positive returns for five out of the first six months in 2009 with 80 per cent of funds ending the second quarter in positive territory.
As markets begin to see a return of risk appetite, hedge funds have regained their footing and many are finding the current market ripe with value in securities which have been oversold. Many managers have been quick to capitalize on these opportunities.
Through the first quarter, hedge funds finished up slightly, returning 0.9 per cent despite double digit losses in major equity markets. As equity markets rallied through the second quarter, hedge funds maintained a relatively defensive positioning, allowing them to capitalize on the upside while also limiting the effects of elevated volatility and financial shocks on their portfolios. As manager risk appetite returned, hedge funds posted their best monthly performance in over nine years, with a return of 4.1 per cent in May. In June, as volatile market movements created dif¬ficulties in the equity space, hedge funds’ cautious stance limited losses and the Broad Index finished up for a fourth straight month.
Hedge funds have outperformed both equity and bond indices through the first half of the year, while maintaining lower levels of volatility.
The report says the performance of hedge funds through the first six months of this year suggests that, as an asset class, hedge funds may serve as a diversifier in normal or normalizing markets. Since 1994, cumulative returns for the Broad Index have exceeded the S&P 500 Index by over 100 per cent and the MSCI World Index by over 200 per cent. Hedge funds demonstrated their ability to generate positive returns while offering diversification benefits in the first half of 2009, and based on feedback from hedge fund managers and the return of inflows into various strat¬egies, investor interest in the asset class appears to be returning.
Eight of the ten sectors posted positive returns in the first half of 2009, with more than 80 per cent of all funds generating positive performance, compared to only 20 per cent of funds in 2008 and 52 per cent in the first quarter of 2009.
Three strategies in particular appear to be generating increased investor interest this year, including convertible arbitrage, which is currently the top performing strategy year-to-date with gains of approximately 24 per cent. The comeback occurred after the strategy experienced a ‘perfect storm’ of market events in 2008 which resulted in a rapid sell-off in the convertibles space. The strategy was then further weakened by a government ban on short-selling, which impaired managers’ abilities to delta hedge their positions. The resulting market dislocation has generated opportunities in the space through the first half of the year as managers have profited from mispricings as well as from new issuances, including an issuance of USD300bn of investment grade paper during January and February, one of the largest to ever take place over a two-month period. The strategy appears poised to continue producing returns as many managers remain optimistic that companies will continue to look to the convertible market for financing needs in the foreseeable future.
The global macro strategy also continues to generate returns, posting positive performance in seven out of the last eight months. Global macro managers have historically performed well during market downturns, and their ability to take positions across various markets, currencies, and/or instruments has enabled managers the flexibility to quickly benefit from developing market trends. Year to date, managers have found opportunities in currency and fixed income trades as central banks continued to adjust rates worldwide and governments increasingly intervened in international markets. Trades in commodities have also been an important return driver in the first six months of this year. As global government stimulus plans introduce liquidity into capital markets, the possibility of rising inflation has many investors turning to commodities as a potential inflation hedge. The ability of global macro managers to capture these types of wide trends across global markets could enable them to profit from such moves and the strategy appears positioned to continue on an upward trend.
Increased commodity prices are also benefiting emerging markets focused hedge funds. The emerging markets strategy finished in positive territory for the second quarter as investors regained their appetite for international risk and bought into strong equity rallies in developing nations. Optimism about global growth and rising commodities prices has buoyed support for emerging market economies, many of which can typically be classified as exporters of natural resources. Despite a lingering recession, investors appeared to react positively to news of continuing demand for goods stemming from emerging markets in Asia and particularly China. China’s second quarter GDP growth rate totalled 7.9 per cent versus 6.1 per cent in the first quarter, an indication that the government imposed stimulus package is working, and leading many to believe that emerging markets will continue to be a positive performer in 2009.
While most strategies are up in 2009, variance in manager positioning might explain the range of returns seen in sectors such as long/short equity, where it is likely that more defensively positioned managers did not fully capture upward market movements during the global rally. The negative outliers in equity market neutral, event driven and global macro sectors each represent a fund in the strategy that is in distress.
Overall assets under management have dropped approximately USD18bn since the first quarter of 2009. Credit Suisse Tremont now estimates industry assets totalled USD1.3trn as of 30 June, down from USD1.5trn at the end of 2008. In the first quarter, the average percentage of outflows across all sectors totalled 15 per cent; however, that number is estimated to have decreased to four per cent in the second quarter. Further, , while the industry is still experiencing net outflows, certain strategies have begun to see inflows returning, such as equity market neutral and global macro, which experienced net inflows of two per cent and one per cent respectively.
Many managers expect to see outflows reverse through the remainder of 2009 as investors regain confidence in the ability of hedge funds to continue to generate returns in addition to the steps managers have taken to increase transparency and lower fees, all of which are designed to send a positive signal to investors.
In general, fund flows have tended to remain consistent regardless of fund size, and there does not appear to be a major discrepancy between smaller funds (less than USD500m under management) versus larger funds (more than USD500m under management). The percent¬age of small funds with positive inflows totalled 16 per cent in the first half, while 18 per cent of larger funds saw inflows during the same period.
