14/12/2011 Author: Tony Griffiths

2011 Review of the Year

Using the best December for a decade as a springboard, hopes for a strong 2011 were further buoyed by several bits of good news in early January.

The hedge fund portfolios of US endowments had enjoyed a boost in 2010 the annual Nacubo Commonfund study revealed, year-end launch data was looking healthy, while HFMWeek began the year with several headlines on increased hedge fund allocations at big pensions funds, including Heineken and Rabobank. However, violent swings in the commodities markets in the second week caused havoc for CTAs and, with Tunisian unrest marking the beginning of the Arab Spring, performance for the month ultimately proved modest – with the HFRI up 0.41%.    

February was less volatile but no less significant. A few big funds were hit by fluctuations in the euro, prompting market rumours that the upcoming weeks would herald a defining period for global economies, particularly in Europe, while markets reacted as the Middle East turmoil spread to Egypt. The month also saw HFMWeek report on corporate governance reviews in both Cayman and Ireland, the EU dig into short-selling proposals and Shumway Capital announce it was returning all outside money. Hedge funds increased bearish bets on natural gas to a two-year high, CTAs recovered, and performance rose – the HFRI gaining 1.23%.  

Headlines in March were dominated by the earthquake and tsunami in Japan. Global equity markets sank and the Nikkei endured its worst two-day period since 1987. Also in the news was a significant personnel shake-up at UBS prime brokerage, with HFMWeek revealing Stuart Hendel’s departure to become the new PB head at Bank of America Merrill Lynch. Prime brokerage people moves would go on to become a theme for the year. Elsewhere, the trial of Galleon Group’s Raj Rajaratnam began, Libya became the latest Middle East state to face revolution, and Blackstone revealed huge interest in its new seeding venture. Overall, performance for the month was flat, with CTAs again taking a hit.        

April began with the launch of Hong Kong-based Azentus Capital – part of a raft of high-profile launches scheduled for the year. Meanwhile, rumours that the SEC was considering postponing its deadline for registration as part of Dodd-Frank picked up pace, and an HFMWeek investigation into bridge financing suggested provider competition is on the up. Hedge funds piled into natural gas and oil rallied amid speculation that the US economy was due a recovery, and, with HFR and HFMWeek both revealing that industry assets had hit record levels, the month maintained a positive tilt. The HFRI posted a return of 1.48% – its best monthly performance YTD.   

After a healthy start to the year, May would provide a rude awakening. Fears concerning eurozone debt and the ongoing turmoil in the Middle East tipped the balance, heralding a period of volatility, alarm and uncertainty that would come to define much of the rest of the year. Other developments saw high-frequency traders feel the heat of the SEC spotlight, the EU consider bans as part of its new derivatives legislation, Raj Rajaratnam found guilty of insider trading, and FrontPoint shutter funds following a wave of redemption requests. To no-one’s surprise, May ended with the HFRI recording a loss of 1.20%.    

In terms of performance at least, June wasn’t much better than May. Most funds struggled with volatile markets, with reports suggesting Paulson & Co had a particularly tough month. Bombarded with redemption requests, Rab Capital also took a hit, and announced plans to delist. It wasn’t all bad news: HFMWeek revealed changes in Texas legislation that will double the amount state pensions can invest, inflows trundled on, and there was a collective sigh of relief as the SEC confirmed an extension of Dodd-Frank registration. Still, performance was down again; the HFRI posting a fall of 1.18%  

July offered some brief respite, thanks, in part, to a noticeable retreat to cash. Reports suggested Soros Fund Management’s flagship moved to 75% cash holdings – followed later in the month by an announcement that the firm was exiting the hedge fund space all together. Perhaps the most significant step was the introduction of Ucits IV, providing Ucits managers with the distribution passport so long promised. July also saw Northern Trust confirm a deal to buy Omnium – the most high-profile deal in a year peppered with admin M&A. Caution pushed the industry back into the black – just – with the HFRI gaining 0.23%.

Crash. On 8 August, after weeks of fluctuations, US equity markets plummeted as fears concerning European debt finally came to a head. Markets in Asia, Europe and the Middle East followed a similarly morbid pattern. Paulson took another beating. The pain would last for weeks, with France, Belgium, Spain and Italy implementing short-selling bans. August also brought a big fine for the directors of failed hedge fund Weavering, although inflows continued to defy performance, with HFMWeek revealing Texas ERS as the latest pension fund to consider a first allocation. Ultimately, however, there was little cheer, as the HFRI had its worst month since October 2008.    
     
September picked up where August left off, with wildly unpredictable markets – spooked by a stream of euro horror stories – bludgeoning long/short equity managers; emerging markets in particular. Man Group made headlines as a disappointing half-year report prompted a big drop in the firm’s share price. On a more positive note, seeding activity continued to chug along – HFMWeek reported on plans in France to raise €100m ($133.3m) for the new Emergence initiative and Calpers made its first seed allocation. Hedge funds ended the month at their most bearish on oil for nearly two months. In the end, the HFRI was down a further 3.78%.

The bulls were back in October as anticipation of positive news from EU leaders created an equities rally in global markets at the beginning of the month. Managed futures also hit the jackpot, with many making up for ground lost earlier in the year. HFMWeek was ahead of the game with news of two big launches – Moore spin-out Stone Milliner Asset Management and Falcon Edge Capital, from former chiefs at Blue Ridge and Eton Park – while the SEC also had good tidings with concessions on Form PF. The end of the month took a sour turn however, as MF Global filed for bankruptcy. All in all though, October offered some relief – the HFRI up a year-best 2.63%.     
    
The early stages of November were defined by counterparty fears. MF Global’s collapse was the result of high exposure to eurozone debt and question marks hung over other brokers, most pertinently Jefferies, whose share price fell off the back of market rumour. November also saw the publication of three major HFMWeek surveys on seeding, Ucits and administration. The seeding sector and Ucits platforms were in rude health, we found, and asset levels had advanced despite the recent troubles. Esma issued its final, albeit inconclusive, guidance on AIFMD Level 2, while BNY Mellon secured a big mandate from Bridgewater Associates – up over 20% through October.    

With almost all strategies staring at a down year, December looks unlikely to boost morale. Schadenfreude may come from slipping crowns (John Paulson’s Advantage Plus Fund was down 46% through November), but most funds are looking at a loss of almost 5%. On the flipside, inflows show few signs of slowing – Transport for London is looking to allocate up to $545m to the sector, HFMWeek reported this month, and London boroughs are poised to increase activity.

Few will be sad to see the back of 2011; a dramatic, volatile, bruising year, but one that, in hindsight, could have been worse. Institutional foundations have made the hedge fund sector more resilient and better prepared for an equally uncertain 2012.

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