Man: More Challenges Ahead For HFs

Date: Thursday, December 7, 2006
Author: Dailyii.com

Low market volatility will continue to present “significant challenges” in 2007, according to Man Investments’ annual review and preview of the hedge fund industry. Market volatility is “still close to multi-year lows in almost all asset classes,” according to the report, which “could make it difficult for directional and trend following strategies to identify strong opportunities.” Noting that volatility is cyclical and likely to return next year, Man says that under current conditions, strategies such as convertible bond arbitrage and global macro should do well, the latter cashing in on a substantial sell-off in U.S. greenbacks. The U.K. firm says it remains “optimistic” that special situation managers can also shine as mergers and acquisition activity is likely to remain robust in 2007. “The big challenge for hedge funds next year,” says Thomas Della Casa, who authored the report along with Mark Rechsteiner, “will be increased pressure on performance from high interest rates.” The authors say they expect to see “some rationalization and consolidation in the industry, particularly affecting managers who fail to meet client expectations.” Della Casa adds that many a hedge fund “missed out on the first part of substantial but heralded recovery in August,” after they reduced their risk exposure as a result of “a rapid reversal in equity, currency and commodity markets in May and June.”  In a related news, a Reuters poll found that fund of hedge fund managers, unhappy with returns in the U.S., will be turning to Europe because of its healthy M&A market. The quarterly survey also found that five of 12 fund managers predicted event-driven strategies would sparkle in 2007. Kris de Souter of Dexia said his firm is betting more money in the U.S. in niche long/short equity managers, particularly those in the financial, healthcare and technology sectors.