Decomposing FoHF returns
Where and when funds of hedge funds add and lose value
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01/06/2010
Editor's view: 27 May 2010
First the fall and now the rise, $2.7bn and counting. Last time the industry reached these highs, the world was teetering. Wobbling on a financial precipice, into which it ultimately plunged. With an uplift of 9% over the past six months, hedge funds have done a good job of climbing out of this cataract. Aided by a year-long bull-run, recently the industry has also benefited from new investor inflows – just as the world appears to be teetering on the brink again.
Two years ago it was private debt, now parched public finances – particularly in the Eurozone – are responsible for market gyrations. We all face the unedifying prospect that, after 2008’s state-financed bank bailouts, there is now no one else to turn to for support. In the words of one departing UK Government minister, the money is all gone.
With the coffers bare, the plunge witnessed on 6 May shows that managers are not out of the woods yet. As the sovereign debt crisis continues to unfold, markets will react violently. Updates on debt and fractured bond markets will beget regular periods of panicked selling.
Panic and poor preparation damaged the industry in 2008. Too many funds were beta-merchants masquerading as hedge funds. While desperate investors dashed for cash; redeeming from stellar performers, as well as the lacklustre vehicles who always had feet of clay. This time, market conditions may have a similar hue, but hedge funds are very different indeed.
In two years, managers have worked hard to shrug off an image of unresponsiveness. They are more transparent and more accountable – they are also better. The natural wastage of the past two years has served to exercise the worst managers, leaving better performers.
Rather than being redeemed from in droves, this new industry will continue to pick up investment – although it won’t be easy. Last week’s figures from the consultant Mercer showed that the FTSE pension black hole had tripled, hitting £160bn. As pension funds act to staunch this – with bonds and traditional equities looking shaky – hedge funds could be the answer. The world is teetering, but this time hedge funds should continue a successful land grab for assets.
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