Decomposing FoHF returns
Where and when funds of hedge funds add and lose value
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11/08/2010
Editor's view: 12 August 2010
Is the Ucits-dream over? Probably not, but one does sense that a year of hubris could be halted in its tracks after a disappointing July and new Lyxor research flagging up the performance drag of these structures.
Still, a rational assessment of the merits and limits of Newcits is very different from a death knell. And, as HFMWeek pointed out a few weeks ago, most investors have entered the Ucits space with their eyes open and accept that, in many respects, they are not true hedge funds. It’s less about the promise of alpha and more about liquidity and transparency.
The majority of managers have been equally responsible. Brevan Howard – which has retreated back to the drawing board with its Ucits range – was always very clear that these products were not pale imitations of its offshore funds, but absolute return vehicles.
It’s also safe to assume that most investors are not blinded by the hedge fund brands launching Ucits. They are not investing in anticipation of hedge fund-like performance, but rather because they represent an important part of a balanced portfolio. Hedge fund behaviour has shifted considerably since the crisis, yet not all are able to offer daily liquidity or absolute transparency. Ucits can.
In a market where equities are uncertain, it’s also unfair to compare a weighted hedge fund index with a Ucits index. Most Ucits strategies remain equity based, while, for example, HFR’s own global index is considerably more multi-faceted. It’s actually probably fairer to compare Ucits performance with the host of equity hedge indices. A cross-check that would provide a more equal set of results.
The rapid proliferation of hedge fund-style Ucits is still a cause for concern; too many managers are crowbarring unsuitable strategies into EU wrappers, and naïve firms are a little too convinced that opening a Ucits will catapult them into the realms of Man and GLG. However, as long as the differences between Newcits and hedge funds are explained to investors, performance drag shouldn’t necessarily be one of these worries.
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What's in a name? Petra Capital Management
Formed in 2005, New York-based Petra Capital Management soon forged itself a reputation as one of the hedge fund industry’s best-known investors in the commercial mortgage-backed securities (CMBS) market.
Founder Andy Stone, an expert in real-estate debt from his time at Solomon Brothers and Credit Suisse First Boston, would even go on to be described as a ‘rock star’ in the field. His choice of moniker for his hedge fund project certainly lends itself to Stone’s background – and more than just in name and reputation.
Petra is, of course, a historically and archaeologically significant city in Jordan, renowned for its architecture cut into the rock face of its central valley. The rock-carved collection of tombs, temples and waterways is one of Jordan’s most famous symbols and tourist attractions, not to mention a regular in popular culture – featuring in films such as Indiana Jones and the Last Crusade. Unesco, which made the city a World Heritage Site in 1985, described it as “one of the most precious cultural properties of man’s cultural heritage”. Most pertinently though, Petra actually means ‘stone’ in Arabic.
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