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Summer 2004 Hedge Fund Barometer: Emerging markets, fixed income and equity market neutral strategies favoured as con arb loses lustre

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Tara Capital, the Geneva-based hedge fund advisory firm has released the latest results from their quarterly Hedge Fund Strategy Barometer (HFSB).

Tara Capital, the Geneva-based hedge fund advisory firm has released the latest results from their quarterly Hedge Fund Strategy Barometer (HFSB).

This is the fourth barometer in the series, which highlights the intended asset allocations moves across the primary hedge fund strategies. The institutions surveyed have a combined USD 91 billion allocated to hedge funds, accounting for over 10% of the total assets invested into hedge funds worldwide.

In stark contrast to the spring HFSB, global macro discretionary and managed futures funds have fallen out of favour with investors. Other sectors where investors appear most nervous are convertible arbitrage and certain event driven strategies.

John Lowry, founder of Tara Capital, said: “Strategies most in favour now are interestingly at either end of the risk /return spectrum, with emerging markets at one end and market neutral equity strategies at the other end increasingly popular in the current market cycle.”

Relative Value Strategies:

* Big winners were fixed income and equity market neutral strategies this quarter. Reflecting falling fixed income markets and directionless equity markets, many investors appear nervous hence the marked shift towards neutralising strategies. Fixed income market neutral, having been one of the least popular strategies in earlier surveys has now recorded two consecutive quarters of increased allocations while equity market neutral has seen an even more impressive increase in popularity with 58% of respondents now planning to further increase allocations.

* The biggest loser in the relative value class is convertible arbitrage reflecting the weight of money squeezing returns, exacerbated by the recent relatively steep declines in performance due to widening credit spreads and the big May sell-off in US treasuries.

Event Driven Strategies:

* Distressed strategies continue to be relatively unpopular.

* This predominantly cautious view appears to be confirmed by the low and falling demand for merger arbitrage funds – in fact demand for this strategy is at its lowest level since the HFSB was launched one year ago.

Long-short Equity Driven Strategies:

* Japanese funds, which had been the most popular strategy of late, look to have come off the boil, with only 28% planning an increase as opposed to 89% in the winter survey. In contrast, emerging market funds look set to receive significant inflows, yet capacity and finding experienced managers remain significant impediments to development of this sector. 

Global Macro and Managed Futures:
* Managed futures funds are falling from favour due to the disappointing returns delivered during the recent market turbulence. The one brighter point is the steady and growing interest towards the more systematic type strategies, which investors are exploring in increasing numbers.    

* With equity and bond markets falling one of the primary strategies that investors were looking to were managed futures and global macro strategies. However due to the very lack of market momentum which affected the equity and bond strategies, these so called low and un-correlated strategies also generally failed to perform.  As a result, many investors now appear to have lost confidence with these strategies reflected in a sharp decrease in planned allocations to both global macro discretionary and managed futures funds. Lowry noted: “At the same time, one important trend to note within the broadly negative sentiment expressed for the sector was the generally positive recent performance delivered by those managers willing to actively trade short term volatility. We therefore see pockets of opportunity for these and the more systematic non discretionary traders, within a less positive environment for the broader category ”


Tara Capital stated: “The latest HFSB seems to confirm the view that investors are increasingly losing faith with many strategies and managers. The lack of market direction is proving an extremely difficult environment for the more traditional long short managers, and is also impacting momentum seeking strategies. At the same time specific strategies appear to be over crowded and expensive – making a difficult marketplace for hedge fund investors.”

Background Note: Tara Capital is a Geneva based investment research and advisory firm dedicated to the alternative investment industry and specialising in the European hedge fund sector.


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