The time of hedge funds?

Hedge funds performances in January have been mixed but resilient according to reports.

Hedge funds have posted mixed performances in January 2016.

Total hedge fund capital was $2.90trn (€2.57trn) to begin the year, almost equalling the mid-2015 record level of $2.93trn (€2.6trn).

According to consultant HFR, hedge funds have had their worst start to the year since 2008; the HFRI Fund Weighted Composite Index dropped by 1.7% in January against a 2.69% fall in 2008.

Kenneth Heinz, president of HFR, said hedge funds that have demonstrated their ability to preserve capital and generate uncorrelated gains through this environment will serve to reduce overall portfolio volatility and continue to attract investor capital into early 2016.

Lyxor assessed hedge funds displayed “remarkable resilience” in January. The Lyxor Hedge Fund index was down -0.9% and 5 out of 11 the firm’s indices ended the month in positive territory.

HEDGE FUNDS ALTERNATIVES
2016 may see investors’ portfolios increasing their allocation to hedge funds as interest rises in alternative strategies.

Commenting the search for alternatives, Michaël Malquarti, head of Manager Research and Alternative Investments at Syz Asset Management, stresses investors’ concerns for the near future given the low-rate environment and equity valuations.

“Long-only strategies might be less appealing in such an environment than more alpha-driven strategies like market neutral ones, for example,” he says, observing “a growing interest for strategies that are similar to traditional hedge funds.”Hedge funds, then, may come to take a bigger share of investors’ portfolios in 2016, having been much castigated following the global financial crisis.

Malquarti observes “it is very European to believe hedge funds have not drawn inflows after the financial crisis of 2008.”

“European investors have somewhat turned away from hedge funds after the crisis, but globally hedge funds’ assets have not decreased. Rather, inflows were positive, even though these went primarily into the largest hedge funds and times were tough for launching new hedge funds.”

Denis Sagaert (pictured), senior investment manager at Delcap Asset Management, shares the view.

“Hedge funds have adapted themselves well in Europe. Most institutions, particularly in the Anglo-Saxon financial universe, have continued to invest in hedge funds,” Sagaert says, pointing hedge funds’ AUM easily returned to records hit before 2008.

“In the portfolios of Swiss and English private banks we monitor, we clearly see hedge funds taking a major place. It is more of a rarity in those banks based in Luxembourg and Belgium,” he adds.

Delcap’s allocation to hedge funds stands at 15%-25% for its balanced portfolio.

However, both fund selectors assess it is too early to speak of a ‘revenge’ of hedge funds.

Malquarti suggests that given the prospect for long-only strategies, hedge funds are appealing again as they keep on producing returns in line with their historical average, that is around 4%-5% above cash.

“Two facts can explain that their current performances are perceived as poor. Cash yields nothing and passive balanced funds have performed much better than they usually do.”

“Over the last 15 years, passive balanced strategies used to outperform cash by around 3% but over the last three or four years, they outperformed it by 5%-6%. It will be hard for these funds to reiterate this performance in the near future,” he explains.

Sagaert believes hedge funds will come back as core strategies in portfolios if markets face deeper turmoil than seen so far.

“Hedge funds have underperformed other assets classes since the end of the 2008 crisis. That is because markets have gone mainly in one direction. However, this started to change in mid-2015.

“In the sell-off of the past three months, we think that hedge funds have behaved quite well. The challenge for them will be to increase exposures near the bottom and not get caught in sharp sector rotations,” he says.

Sagaert concludes that hedge funds should only be judged over a full equity and interest rate cycle.

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