Progress report
An assessment of hedge fund YTD performance in the face of renewed fears for a potential eurozone crash Read More
02/02/2011
Comment: Christopher Miller
The future is notoriously hard to predict. It’s not just the hedge fund industry. The British Met Office, which predicts the weather for the government, has got its forecasts badly wrong for some years, in a consistent direction, and in the manner of a trader who can’t resist running his losses, and keeps banging on the same trade in the belief the market has misunderstood the facts.
This year they claim to have predicted the hard winter for the UK, but we only have their word for it because they kept the prediction secret. Anyone who has created a hypothetical trading or pro-forma fund of funds track record will recognise that prediction with the benefit of hindsight can be satisfyingly successful.
There is still no shortage of opinion on whether 2011 will be favourable for hedge funds. 2010 was not particularly good, compared with equities. While equity returns are more volatile, they tend to produce lower returns over medium to long-term time frames, but, because of the volatility, equities will often outperform hedge funds over shorter intervals.
This fact does need to be reiterated frequently because we are all programmed to expect current trends to persist. Such a behavioural pattern is a useful survival instinct for animals, and is valid for many aspects of human life. Indeed, trend-following trading models rely on this knowledge, and work often enough to give a trading advantage, but it is very difficult to predict exactly when they will or won’t work.
Anyone who states specifically that ‘2011 will be a good year for hedge funds’ as a few blithely have in the first four weeks of the year, either has no understanding of future uncertainty, or a somewhat cynical approach to fund sales. Or both. The truth is that no one knows for sure.
I look chiefly at two parallel models of what is going on in the markets. On a superficial level, there are tentative signs of reversion to the norm, with more corporate activity getting underway, and stock markets more buoyant and optimistic. I’m not sure we have yet seen a full release of pent-up pessimism explode the other way, but the signs are at least better.
On the other hand, many global assets are still over-valued. Banks and governments are virtually bankrupt, and financial markets are less able to operate freely and without political or regulatory interference.
But even as commentators express shock at ‘walking dead’ banks and governments, while China reins in its growth, I am not convinced that the logical disaster will happen for three reasons.
Firstly, and most obviously, optimism feeds optimism, and a perceived recovery can lead to a real – bad weather permitting – recovery. Secondly, ‘walking dead’ banks and governments may be a new development for the US, UK and Europe, but other places, such as Japan, China and India have survived extended periods of time with vital balance sheets resembling polystyrene blocks dipped in chocolate.
Thirdly, the financial system would probably disintegrate completely on a failure the size of Lehman, or if a significant country came to a sticky end. World leaders know that and it will not be allowed to happen. The most we can expect is constructive default by devaluation, and any facelift for the euro will be very carefully managed.
Very few managers have performed consistently well before, during and after the crisis, and there have been plenty of rising stars as well as falls from grace. I expect a continuation of this particular trend, so choose your managers wisely.
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60 seconds with... Kenneth Turchin
CAN YOU DESCRIBE YOUR CURRENT ROLE?
I have worked in public accounting and hedge funds and in the past eight years have been selling middle- and back-office services to the alternate investment industry. My role is to build relationships with clients, teach them about SS&C’s products and services, and ensure seamless transactions every time the firm launches a new fund.
IF YOU WERE DOWN TO YOUR LAST £1,000, HOW WOULD YOU INVEST IT?
I would buy THREE shares in Apple and hope for a repeat 383% return in the next five years.
WHAT WOULD YOU DO IF YOU WERE IN PRESIDENT OBAMA’S SHOES?
That’s one pair of size 12 shoes I do not want to be in!
WHO WOULD PLAY YOU IF THEY MADE A MOVIE ABOUT YOUR FIRM?
Kevin Bacon. He is a versatile actor and the centre of the entertainment universe. I am in sales. Everyone in the industry would be linked to me in six steps or less. My client list would be ridiculous.
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