Gap between best and worst hedge fund returns at decade high

The dispersion of returns between hedge funds in September was the highest ever seen by Luke Ellis, head of Man’s multi-manager unit and a veteran of at least 13 years in the fund of hedge funds business.

“The dispersion came from managers who hedged things out and then found the market looking for anyone with risk ‘on’, and trying to rip the risk out of their hands,” Ellis (pictured) said.

He said about one third of the managers his unit regards highly either made over 5%, or lost more than 5% – “a remarkable dispersion” in Ellis’s view.

He added: “Over the last two months there have been a handful of opportunities to make or lose 20%, and in both we saw the range of [industry returns from] up 20% to down 20%”.

Analysis from FundWizard of the database in September suggests, measured over the 12 months the gap is even wider.

Among 1640 equity long/short managers, the rolling 12 month return to September showed a 78 percentage point dispersion between the top and bottom 25 (42.4% gains versus 36.2% losses). In August this gap was 88 points.

Among 1900 funds of funds September’s gap was 51 percentage points (24.3% gains versus 26.7% losses), roughly equal to August’s gap between best and worst.

Overall hedge funds lost 2.3% of their value in August; 2.8% in September; and fell 4.7% this year by 30 September, according to Hedge Fund Research.

Ellis said a manager losing 20% faced “two or three years of decent performance” to make good past losses. Only at this point would a 20% performance fee – the lifeblood of many hedge fund businesses – become payable once more.

He expects jittery investors to make net withdrawals from funds over this quarter.

Only at year’s end will redemption requests filed after summer take effect, for an offshore fund offering typical terms of 30 days’ notice plus 45 days’ redemption.

But he added there were no signs of investors filing withdrawal requests for fear that others would, too – as the industry saw in late 2008.

Net inflows early next year are feasible, he added, if markets calm.

But Ellis does not expect large gains from funds by December.

“Hedge funds are not really in the game. Although people say they would like to get back in, they are waiting for a cathartic moment in Europe. Anyone who is expecting the ‘Great Reveal’ on Wednesday is kidding themselves.

“The market and a lot of hedge fund managers are getting tired of this volatility and we may see two to three months of relative quiet. It is amazing how many lunch invitations I have been getting, because people do not want to be at the desk, because that’s expensive.”

Ellis said one group to stand out recently has been trend-following, computer-driven funds, called CTAs.

“The strength of CTAs is they will continue running full risk because that’s how their model works, and that was extremely beneficial in August.”

Computer-driven funds made 0.9% in September, according to monitoring by brokers Newedge.

But FundWizard analysis suggested it might be the most difficult of all the strategies, to pick the right CTA – the dispersion in September was a massive 81 percentage points.

Pick the top 25 CTAs and you made 54%, but pick the worst 25 and you lost 28% on 12-month returns.

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