HSBC alternatives unit favours macro managers until market fundamentals reappear

Correlations between assets are around their highest point for at least 21 years, leading HSBC Alternative Investments to favour trading and global macro strategies in their hedge fund investments.

The third largest investor in the industry is also keeping its portfolios liquid, so if this situation changes and fundamentals reassert themselves, it can move quickly into more fundamentally-driven strategies.

Equity long/short, one such strategy and the industry’s most popular, had a poor 2011 – it lost 8% and ranked last of all major strategies except emerging markets hedge funds, according to Hedge Fund Research.

HSBC AI flagship Global Hedge fund of funds has about 30% of assets in the strategy, down from about 50% before the crisis.

Peter Rigg (pictured), global head of HSBC’s alternative investment group, said: “Stock correlations are at very elevated levels, which is a difficult environment for fundamental managers to make money in.”

Consequently, the 20 day rolling correlation of hedge funds to US stocks is as high as it has been since at least the start of last year.

Within equity long/short, HSBC AI now favours short-term trading strategies, better placed to negotiate the risk on / risk off climate of 2011, and sector specialists such as healthcare (Visium), TMT (JAT) and energy and shipping (Oceanic).

HSBC AI also favours nimble managers, and has invested in 10 smaller start-up managers via its HSBC Next Generation fund of funds, which has $200m committed to it. Target funds there include Apson, DSAM, Avantium and OVS, as well as Zeal and Dymon Currency in Asia.

Rigg says: “We are conservatively positioned, because at some point there will be a return to fundamentals and correlations will come down, and some of the fundamental managers can really start to make money.”

Some already have as equity markets jumped last month. Odey Asset Management’s Odey European fund made 14% this year, while GLG’s European long/short fund made 4.7%, according to reports. The Eurostoxx 50 made 4.3%.

When market fundamentals reassert themselves more fully, Rigg will switch more to stock-pickers, European credit, some activists and relative-value managers.

He concedes the industry’s performance last year was “disappointing in absolute terms” – its 4.8% loss was the second worst for at least 21 years, says Hedge Fund Research – “but in relative terms it was better”. Global shares lost 10.1%, and developing markets equities fell 8.2%, according to Standard & Poor’s Indices.

Rigg said opportunities would arise in Europe, particularly in credit, though the funds there would be less liquid. He said likely catalysts providing opportunities were large corporate refinancing required in Europe soon, and Basel regulations.

HSBC launched the Credit Market Opportunities fund of funds late last year. “We are building up the portfolio to take advantage of corporate credit and ABS, we have five managers there now and are working at investing over the coming months.”

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