Equity hedge allocators demand niche expertise of managers

Hedge funds playing in share markets still control more assets than any other strategy in their industry, but after the sector led their peers’ falls last year, allocators have very different levels of appetite for the various sub-strategies within ‘equity hedge’.

This is hardly surprising – the average equity long/short hedge fund lost 8.29% last year, making the strategy the industry’s second worst, according to Hedge Fund Research.

Morten Spenner (pictured), chief executive of fund of funds International Asset Management, said: “In the current macro-dominated environment, sourcing profits from more specialist areas of equity focus, and idiosyncratically driven positions, are more likely to provide higher returns.”

In other words, being a generalist equity hedge fund manager is no longer enough.

A Credit Suisse study on the industry published this week found net demand for equity hedge suffered the largest year-on-year fall, from 53% to 12%, according to fund buyers responsible for allocating about half the industry’s total assets.

Spenner’s elegant differentiation within ‘equity hedge’ is broadly reflected by the investors polled in the Credit Suisse study.

Last year, the all-encompassing category of ‘equity hedge’, which holds about 27.5% of the industry’s $2trn assets, suffered the industry’s second largest losses of 8.3%, outdone only by emerging markets hedge funds generally.

Spenner said IAM is now seeking Far East equity hedge specialists, “to add value through stock selection on both the long and short sides of their books”.

He added long/short equity managers with “strong tactical trading abilities” should also be able to benefit from the expected market conditions.

The appetite of Spenner’s investing peers in the industry for equity hedge’s sub-strategies this year – as measured by Credit Suisse – is broadly in accord with the performance of the various sub-strategies in last year’s markets.

This might not surprise, as many buyers and managers expect broadly similar market conditions this year.

For example, net demand for long/short equity trading managers, who suffered modestly less severe losses of 7% last year, was about 24% – double the overall hunger for equity hedge.

For equity market neutral, which lost just 2.1% in 2011, net demand held up at 18%, and at 14% for equity hedge funds focused on technology, media and telecom stocks, which made 1.5% last year.

On the other hand, for energy/basic material equity hedge funds that lost 17.3% of their value in 2011 net demand was just 8%.

Other equity sector specialists such as utilities, consumer/retail, financials and real estate equities, also face net demand of less than 10% from allocators this year.

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