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June 13, 2006
Hedge funds look for better Q4 returns
Fund of hedge fund managers expect returns to pick up in the final quarter of the year after a burst of volatility in global markets that drove many to seek more risk-averse strategies, according to a Reuters poll.
The quarterly survey of 12 funds of hedge fund managers, which together manage $80.6bn, showed average returns would be made over the second half of the year, with improving returns from global macro, long/short Japan, and emerging market strategies in the final quarter.
The poll, carried out from May 24 to June 6, showed little change in funds’ optimism about returns compared with the last survey in March, despite last month’s sharp falls in commodity prices, stocks and emerging markets.
Even so, the latest poll showed a slightly reduced appetite for long/short strategies - buying stocks seen as cheap and short selling those seen as expensive - compared with the March survey.
“We believe we have to stick to quality and that can be found in multi-strategy managers that have a reduced beta (a measure of volatility) and can weather some form of market correction,” said Robert Khoury at Union Bancaire Privee.
He said UBP had reduced its long/short equity position in the past two months to 30-35% from 40-43% previously in some of its more aggressive portfolios.
Despite poor returns by some managers in the last few months, hedge funds traditionally thrive on volatility.
“We like all volatility-related strategies as it appears to be coming back,” said Mark Yusko at Morgan Creek Capital Management. “So much money left the convertible arbitrage and merger arbitrage space that we are raking it in with our managers in those spaces,” Yusko added.
Morgan Creek’s hot strategy over the second half of the year was energy trading.
“There has been a tremendous loss of capital from the energy trading business and that usually leads to strong returns for those who stick around,” said Yusko. However, he added that energy markets should be volatile over the summer as a result of inventory concerns and the hurricane season.
Global macro strategies, which involve taking positions on macro-economic trends and spotting directions in currency and commodity markets, were also seen likely to produce higher returns in the final quarter.
“There is good money to be made in global macro. In the past we have seen very little opportunities for global macro players in fixed income, but that has changed quite dramatically in the last few months,” said Tim Gascoigne at HSBC Republic Investments.
Managers see less ground for optimism within their US portfolios. Median estimates showed allocations to US stocks falling to 13% in the fourth quarter from 15% in the third quarter.
But they are looking to profit from heightened volatility in emerging markets. Median estimates showed allocations to the sector at 8% in the third quarter, up from 6.5% in the last survey, and rising to 9.0% in the final quarter.
“Regardless of excellent returns during 2005 and so far in 2006, this asset class will continue to prosper,” said Dawn Kendall at GAIM Advisors, adding the main risk was that the asset class would become crowded, diluting returns.
She said GAIM’s hot strategy over the next couple of quarters was global macro, which had disappointed last year. This year global macro funds are performing better and would benefit from currency movements, a change in global interest rate policy and rising commodity prices, Kendall said.
–Reuters-
Posted by su at June 13, 2006 3:16 PM