Progress report
An assessment of hedge fund YTD performance in the face of renewed fears for a potential eurozone crash Read More
09/03/2011
Comment: Alper ince
Last year was a challenging year for stock-pickers in European equity markets. And the challenges have continued into 2011, with a substantial stock rotation in January and a spike in macro-driven volatility due to the turmoil in the Middle East in February. The key question is, how can long/short equity hedge funds protect investor capital and continue to make returns in such markets?
In 2010, we saw high levels of stock correlation overlaid with bouts of macro-driven volatility. Indeed, there were sustained periods in which markets traded almost purely on sovereign debt-related news coming from the troubled Pigs (Portugal, Ireland, Greece and Spain). Concerns about the balance-sheet health of European financial firms added to the uncertainty, and as badly needed austerity measures were implemented, sectors exposed to government spending endured additional bouts of volatility.
This year started with yet another challenging period for hedge fund managers, who were caught in one of the sharpest and fastest rotations that European markets have experienced in many years. Last year’s outperformers (core Europe, emerging markets-exposed sectors) turned out to be underperformers in January.
In Europe, as policy-makers expressed commitment to support periphery markets, both sovereign spreads and equity markets rallied. It is rare to see a rotation of this magnitude outside of major turning points in the economic cycle – and there is still some uncertainty over the cause. Insurance companies shifting their portfolios more towards equities and buying last year’s losers? Macro funds buying last year’s underperformers using ETFs and baskets? Or possibly inflationary pressures in emerging markets having increased, European sectors (luxury goods, autos, etc) with significant exposure to emerging markets demand were sold off.
Through February and on into March, the uncertainty continued. Civil unrest in the Middle East began to have an impact, with significant spikes in oil prices which led to general market sell-offs, not just in Europe but also globally. As contagion fears from Tunisia to Egypt to Libya unfolded, equity markets were increasingly driven by macro factors such as political risks, commodity prices and the impact on net oil importing European countries, not to mention Libyan investments in Italian companies.
So where does that leave hedge funds? Which are going to be successful navigating markets in what has certainly started as a difficult year? In some ways it’s not unlike 2010. Macro events have led to increased correlations and the dislocation of stock prices from longer-term fundamental value. This creates opportunities for bottom-up fundamental managers both on the long and short side.
For example, a number of firms in the automobile sector were oversold during macro-driven volatility and have recently been a focus of fundamental managers. Many managers concluded that the rotation in January was technically driven and did not cause a shift in the fundamental outlook of the stocks they have been analysing, and maintained exposures to fundamentally intact stories. However, February’s events in the Middle East have been more difficult to analyse, given that the overall situation is still in a state of flux and may lead to a variety of outcomes. This highlights the need for fundamental managers to also be macro aware and ready for unexpected volatility by running well-hedged portfolios with a healthy balance of longs and shorts.
Alper Ince is a partner and sector specialist responsible for long/short equity hedge fund managers at Paamco
- Share
-
Text Size
Decrease text size
Increase text size
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.
HFMWeek Daily Snapshot - 17 May
Today: Magnetar Capital subject of SEC probe; Paulson keen on CVR Energy following Icahn involvement; mini victory for US prosecutors in Rajat Gupta insider trading trial; and more...
SS&C wins Form PF mandate from $23bn Lone Pine
SS&C Technologies, the hedge fund administrator, has been mandated by $22.7bn Lone Pine Capital to provide its Form PF reporting solution, HFMWeek has learned.
Squeeze on fees continuing, according to State Street
Downward pressure on fees for hedge fund services such as administration, alongside an increased demand for more transparency on pricing, continues to be a defining industry characteristic, State Street executives said today.
Investor demand for CTAs is on the rise, says Agecroft Partners
Agecroft Partners is seeing widespread demand from institutional investors for Commodity Trading Advisors (CTAs), which is a dramatic change from the historical reluctance of many institutional investors and their consultants to allocate to this strategy.
Read More07/06/2012
UK: Impact of the AIFMD - the real story
Join us and our panel of experts for HFMWeek's Subscribers' Club June's UK breakfast briefing, 'Impact…
31/05/2012
US: Family Offices
The next US HFMWeek Subscribers' Club breakfast, will take place on Thursday May 31. Join us and…
02/02/2011
European Hedge Fund Services Awards 2012
HFMWeek's European Hedge Fund Services Awards are designed to recognise companies that have outperformed...
Be the first to comment on this article!