There’s a lot resting on this week’s Eurozone summit meeting. If Merkel et al can reach some agreement and provide concrete figures on the EFSF and bank recapitalisation it’ll go a long way to reassuring the markets.
Luke Ellis (pictured), Man Group’s Head and CIO of Man Multi-Manager, speaking to journalists at a press briefing at the firm’s London office on 24 October, believed more stable market conditions would be seen over the next couple of months, noting that hedge fund managers are simply getting tired of volatility swings.
“Hedge fund managers prefer markets to act semi-rationally rather than in a vacuous state,” said Ellis, referring to Soros by saying the markets are in a state of perfect disequilibrium. Aside from CTAs, managers cut risk this summer, maintaining gross exposure levels but reducing net exposure to give books more of a relative value look. “Current gross exposures are as low as they were in ’08. In October hedge funds haven’t really been that active – they’re waiting for some kind of cathartic movement in the markets but it’s not coming,” added Ellis.
It’s little wonder investors are concerned and confused by the markets at present. More and more they’re looking for funds that provide diversification, downside protection and that have an institutional set up. Ellis believes there’s a lot of mis-pricing out there, and subsequent alpha opportunities: “We just need the markets to calm down a bit”.
Even though managers have been squeezed in recent months, with a small percentage having experienced performance in the +-20 per cent range, investor sentiment is different now to what it was pre ’08: principally because pension funds have more long-term views than HNW clients. Ellis conceded that, over the short-term, there were some investors looking to disinvest but on the whole Man’s multi-manager assets under management (USD12.7billion in FoFs, USD9billion in managed accounts) were still reasonably okay.
He believes that where the markets are in November will determine the level of outflows year-end, but doesn’t expect this to be a big wave because hedge fund investors are much better informed today. “There’s zero evidence of major outflows coming year-end, both in FoFs and single funds,” said Ellis, noting that leverage levels are incredibly low at the moment: something that no doubt reassures institutions.
Ellis gave a brief insight into Man Multi-Manager’s philosophy when choosing new managers. Referring to the fact that a few of its managers had suffered large drawdowns over the summer, Ellis said this wasn’t necessarily a big concern. He said that Man’s job was to be a mean reverting trader of managers. “I’d rather invest with a manager who’s had a drawdown and understands how/why it happened than invest with one wearing a halo and running boatloads of money,” said Ellis. The point being that all managers suffer drawdowns at some stage. Better to go with managers that have already come through one with the battle scars to show for it as opposed to one that might be on the brink.
Speaking about investors’ long-term sentiment, Ellis made a couple of key points. Firstly, that asset allocation was the most important decision facing investors. Getting the timing right is critically important to the funding levels of portfolios. Pension funds aren’t necessarily great when it comes to allocating between bonds and equities. Now, said Ellis, they recognise that CTAs can actually make these investment decisions for them.
Secondly, institutions better understand the benefits of strategies like CTAs that ride the trends they themselves are often responsible for creating. Whenever equities do well institutions increase their long-term allocations, thereby helping to extend the move. It plays right into the hands of CTAs. With global bond yields at historic lows, Ellis thinks that long-term institutional allocations into hedge funds will be positive.
Asked by Hedgeweek whether he was seeing more interest in allocation to distressed debt strategies, Ellis said that he’d received more emails from Euro-focused distressed debt funds over the last six weeks than he cared to remember.
“Our allocation is still very small. For distressed debt to work you need a lot of clarity on legal structure in countries like the US where presently there’s not a lot going on. We have a couple of managers but their average holding period is only one week!”
Overall it seems hedge fund managers are doing exactly what they’re supposed to do. Yes, there have been a few that have suffered drawdowns, but many have reduced their net exposures, their leverage, preserving capital as they wait patiently to dive back in.
“If things calm down the place to lean down heavily will be on security selection strategies – that’s the opportunity on the table,” concluded Ellis.