Low net positions and the popularity of relative-value strategies suggest that hedge managers are reining in their risk.
Go to the cinema these days and you will see hedge fund managers being portrayed as high-flying risk-takers, in films such as Arbitrage and Cosmopolis.
Then turn instead to the choppy and politically-driven financial markets, and you will find the reality in regards to risk-taking is quite different.
These days, it seems clients prefer the reality to the myth. This year to June, fund buyers sharply cut their exposure to strategies that historically have taken larger directional bets. Two main protagonists, equity long/short and event-driven, suffered withdrawals of $4.3bn and $1.8bn, respectively.
Relative-value managers were the main beneficiaries of a rotation, as they took in $22.3bn fresh business. These managers invest according to the relative value of related instruments, rather than the directional movement of either instrument on its own.
If current net flow patterns persist, relative-value will soon overtake equity hedge as the industry’s largest strategy by assets. By June the race was tight – relative-value held 26.4% of the industry’s $2.1trn assets, just behind equity hedge’s 27.1%, according to Hedge Fund Research.
Equities strategies had $1.3bn drained from them in the second quarter, and they lost nearly 20 times more than that on their investments. Relative-value strategies lost only $479m on their investments, but enjoyed $9.9bn of inflows.
Morten Spenner, chief executive officer of allocator International Asset Management Ltd, says the move towards relative-value strategies has been one of the hedge fund industry’s defining features since the 2008/2009 crisis.
Allocators were hurt by the 18% loss from relative-value funds in 2008, showing it is not a risk-free strategy, but they suffered sharper losses of 26.6% from equity long/short and 21.8% from event-driven.
Spenner says: “For the last three or four years it has all been about global macro and relative-value, and now allocators are tending more towards relative-value.”
They have been vindicated in their preferences so far this year. Relative-value strategies made 6.5% by August, the third best strategy HFR tracks. Global macro made 1.0%, and hedge funds overall returned 3.5%.
Relative-value funds were fairly flat last year, but markets then made simply avoiding losses an achievement. In 2010 relative-value made 11.4%, slightly above the industry average.