Hedge funds needed more than ever – HSBC

HSBC Private Bank is maintaining its highest conviction overweight in hedge funds in the belief that the current investment environment calls for an active approach to risk management which can be provided by hedge funds.

HSBC is in the top three globally of hedge fund providers and has one of the largest proprietary research capabilities. “We remain optimistic regarding the future opportunity set for hedge fund managers,” noted Willem Sels, UK Head of Investment Strategy. “As evidenced by the events of recent months, the current investment environment calls for an active approach to risk management, which we believe can be provided by hedge funds.”

In 2010 volatile markets were driven by macro events and significant swings in risk appetite. One of the major challenges for investors was the high correlation between assets.

“As the deflation / recession scenario has now become much less probable, we believe that more fundamental analysis will become more important in the coming year,” says Sels. “That will increase the need for active management, and the importance of long / short positioning within portfolios.”

Tim Gascoigne, global head of portfolio management at HSBC Alternative Investments and manager of HSBC UCITS AdvantEdge Fund of Hedge Funds says the year presents an ongoing challenge for investors, as risk appetite reversals have required a strong risk management framework across strategies.

“Asset correlation has been particularly high, reflecting uncertainty in markets and providing few hiding spots from downside. In an environment where fundamentals have been largely ignored, hedge fund managers, in general, remained true to their primary goal: capital preservation. When the environment is not conducive to their investment approach, they limit exposure to losses and avoid unnecessary risks. Therefore, we have seen lower leverage and market exposure, as managers await better risk-adjusted opportunities.”

“Looking ahead, our highest conviction is with the discretionary macro strategy. We expect the uncertain macroeconomic outlook to provide opportunities for interest rates and currency strategies and we focus on these two most liquid sectors. Equity markets have been driven by economic sentiment for two years, creating significant miss-pricing of individual equities.

As and when the environment changes and individual stock prices reflect more closely the fundamentals of these companies he expects to see outsized returns from equity long/short strategies that adopt a more fundamental and value oriented approach. Equity market neutral strategies, on the other hand, have performed well this year, driven by technical models in both equities and futures.

“Managers focusing on distressed opportunities continue to perform positively, supported by advances in individual work-outs. In addition, residential mortgage-backed security strategies performed well, driven both by carry and pricing which continue to reflect a gradual recovery in this sector. In addition, we believe that the maturity calendar from 2011 to 2014 for many debt issues will create opportunities for managers in catalyst-dependent relative value credit trades.

“The up-tick in merger activity is likely to continue to support merger arbitrage as a strategy, as options for organic profit growth amid consumer deleveraging seem limited and cost-cutting solutions are almost exhausted, leaving the possible synergy from take-overs as an attractive option.

“Although hedge fund managers have been challenged in the current sentiment-driven environment, we believe a strategically diversified and balanced approach to hedge funds will continue to benefit investors.”

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