Is hedge fund investing making a comeback?

Appetite for hedge funds may be returning after years of being the black sheep of the asset management industry, says Momentum Global Investment Management.

After the collapse of Lehman Brothers, and since 2008, the industry has endured persistently bad press, hitting both hedge funds and hedge funds of funds. However data from index provider Hedge Fund Research (HFR) indicate that the industry has been stabilising in recent months.

John Caulfield, CIO of Alternative Strategies for Momentum Global Investment Management, said: “Demand for hedge funds remains robust. Assets are back to their pre-Lehman peaks of approximately $2trn. Although the trend is definitely one of the big getting bigger, large funds account for approximately 3% of the universe by number but control approximately 85% of assets. This is despite overwhelming evidence showing small, new funds outperform large old funds.”

Research by Momentum shows that small hedge funds are outperforming their larger competitors in general. Hedge funds are still attracting capital as returns for the industry is relatively attractive.

Momentum advises that investors should move away from the larger funds, and re-engage with some of industry’s perceived black sheep in order to get the full benefits of the stabilising market. While hedge funds are still vulnerable to systemic events when compared to equities, they tend to have shallower, shorter lived drawdowns with solid recoveries relative to the initial loss.

The risks associated with hedge funds, especially with the Eurozone troubles, are likely to catch out investors. Investors are warned to properly look at what exactly it is that they are buying in order to minimise any necessary risks. Illiquidity within the sector, lack of regulation, fraud, operational risk, gating and restricted liquidity terms are major factors to consider. Investors are warned not to be lulled into the false sense of security that big is always better.

Caulfield said: “There are broadly three ways to get exposure to the asset class – invest direct, invest through replicators or invest through funds of hedge funds. Replicator performance has been extremely mixed and they require skill to select, making them unsuitable as beta products. However, they also proclaim to be representative of the hedge fund universe making them unsuitable as alpha products.

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