Focus on hedge funds: Return dispersion near long-term lows makes tough work for hedge selectors

Fund selection is becoming increasingly difficult for funds of hedge funds as the dispersion of returns between the best and worst managers for many strategies is lower now than at any other point since the onset of the credit crunch.

According to one allocator’s analysis, the differences between six-month rolling returns of the 90th percentile and 10th percentile of managers within 11 strategies are at, or very near, their lowest point since at least late 2007.

The present dispersions of returns within fixed income relative-value, volatility arbitrage and US long/short are all as low as they have been since at least mid-2005.

Dispersion within global long/short is lower than at any moment since September 2006.

Lower dispersion has only appeared twice for convertible bond arbitrage since mid-2005, and for credit since mid-2007.

But for allocators who shift to a top-down process instead of focusing on differentiating managers within strategies, the dispersion of strategies one from another has not been much help, either.

On examination of performance data from Hedge Fund Research, no single strategy particularly stands out so far this year.

Returns from some of the most popular sit around the 2%-3% mark. Equities and event-driven strategies have made just over 2%, multi-strategy offers 3.3% and relative-value, the best performing of the lot, has hardly made much more, at 4.3%.

Morten Spenner (pictured), CEO of funds of funds International Asset Management, says: “Over the past six or nine months, it doesn’t seem to have mattered which strategy or manager you select, because they have all performed pretty much the same. It complicates the whole view of hedge funds.”

But investors are hoping this situation will eventually correct itself. This, in turn, raises the question of how one is to pick now the managers or strategies that will eventually outperform their peers.

Some investors are opting for the strategies of asset-backed securities, synthetic credit and structured credit, all unpopular during the 2007/2009 crisis but offering attractive yields.

These strategies have generally done better than peers this year, indeed asset-backed is up 10.4%.



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