« Are emerging markets facing bubble trouble? | Main | Regulators take contrary views on hedge funds »
March 14, 2006
Funds of hedge funds eyeing stocks
Funds of hedge funds expect to make solid profits over the next two quarters, with Japanese and US stocks seen as particularly good investments, a Reuters poll shows.
The Reuters survey of 10 funds of hedge funds, which together manage some $74 billion, forecast average returns in the next three to six months.
Funds of hedge funds spread their money between hedge fund strategies to diversify their portfolios and minimise risk. Funds were slightly more optimistic about expected returns across a range of strategies compared with the last quarterly poll in December.
The survey showed funds allocating the biggest part of their money an average of 36.5 percent in the second quarter of 2006 to the long/short strategy, which buys stocks seen as cheap and short sells those that are expensive.
They predicted above average returns for the overall long/short strategy over the next six months. Strong global economic growth should support share prices and increase profits from long/short strategies, which tend to make most of their money by prices trending up, they said. Increased volatility in equity markets may also create opportunities for arbitrage hedge funds, which buy and sell securities against each other.
“Greater volatility is a path to higher return,” said Russell Abbott, senior vice president at Auda Hedge in New York. “You can make the case for modestly higher equity prices internationally (but) I am bullish on volatility within equity markets and the opportunities that will give our managers to pick the winners from the losers.”
Seven of the funds in the Reuters poll picked long/short equity or some form of it as their hot strategy over the next three to six months. Across regions, they saw the strongest returns from Japanese stocks in the next six months and were more upbeat on the outlook for US stocks in the third quarter. Emerging markets, M and A boost
Solid returns were also seen in the global macro strategy, which involves taking positions on macro-economic trends and spotting directions in currency and commodities futures markets. Fund of funds said they would be allocating around 14 percent of their assets to the strategy over the next three months and expecting average returns.
Over the next three months, they predicted slightly below average returns for managed futures, which trade using buy and sell signals from computer models and above average returns for emerging market strategies, which use equities or fixed-income instruments.
“Many of the foreseeable risks to emerging markets in 2006 a decline in risk appetite, reduction in global liquidity, sharp rise in US Treasury yields and decline in commodity prices lie outside the asset class,” said Kris De Souter, head of multi-management at Dexia Asset Management. Those risks were offset by the potential for additional ratings upgrades and strong capital inflows, he added.
But De Souter expected to make the best returns from the merger arbitrage strategy over the next six months, while funds overall allocated around five percent of their money to this strategy and expected to make average returns.
In most M and A cases, hedge funds buy shares of the target company and sell those of the bidder on the expectation that any final transaction price will be a lot higher. Some funds trade the volatility of the stocks involved.
“We expect to see continued merger and acquisition activity driven by deployment of capital from leveraged buyout funds raised in 2005 and pressure on companies to re-leverage their balance sheets to enhance shareholder returns,” he said.
-Daily Times-
Posted by su at March 14, 2006 9:49 AM