Emerging hedge fund managers bullish on US equities, bearish on Russia

Managers of fledgling hedge funds expect US equities to be the top-performing asset class in 2007, but see Russia and Latin America as regions to avoid this year, according to the second annual Emerging Hedge Fund Manager Sentiment Survey conducted by brokerage group VanthedgePoint.

Emerging hedge fund managers indicated they are largely neutral on the US economy (57.4 per cent) and the US equity markets (44.3 per cent) for 2007, the survey found. Around one-third are bullish on the economy (32.8 per cent) and on U.S. equities (37.7 per cent), but believe a continued real estate market slowdown (29.5 per cent) and inflation (21.3 per cent) will play the biggest role in how the US economy performs this year.

Asked where to invest in the US stock market, survey respondents said technology (41.0 per cent), financial services (31.2 per cent), consumer goods (26.2 per cent), food and beverage (21.3 per cent) and defence (21.3 per cent) would be the best performing sectors in 2007, but that automotive (32.8 per cent), real estate (27.9 per cent), energy (21.3 per cent) and home building/furnishing (21.3 per cent) would be among the worst.

Among US equities, emerging hedge fund managers believe that large cap stocks (36.7 per cent) will perform best in 2007, followed by small cap stocks (33.3 per cent). Internationally, they forecast China (34.4 per cent) and Japan (34.4 per cent) to be the top performers along with eastern Europe (23.0 per cent), but expect Latin America (37.7 per cent) and Russia (23.0 per cent) to be the worst places to invest.

U.S. equities (44.3 per cent) are expected by survey respondents to be the best asset class this year, followed by international equities (31.2 per cent), while sentiment about which asset class will perform worst was almost evenly split between real estate (27.9 per cent), high yield debt (24.6 per cent) and commodities (21.3 per cent).

More than half of all respondents manage hedge funds with less than USD10m in assets under management, while more than 85 per cent currently manage less than USD100m. Over 90 per cent are located in the US, while nearly one-third have both onshore and offshore vehicles for investors. Emerging hedge fund managers indicate that the most difficult aspect of running a hedge fund business is raising capital and marketing (70 per cent).

One notable finding was a significant increase in usage of index products among emerging hedge fund managers. More than 62 per cent of respondents said they used index products in their portfolio in 2007, while another 8 per cent said they were considering using them, compared with only 44 per cent of respondents using index products in 2006.

Last year's Emerging Hedge Fund Manager Sentiment Survey results turned out to be quite accurate, VanthedgePoint says, as respondents predicted increasing energy costs and a real estate market slowdown, both of which slowed the US economy in 2006. They also correctly predicted that technology, raw materials, financial services and defence would be among the top performing US sectors, and were narrowly off the mark in predicting that China would be the best performing international market.

'The results of our second annual survey provide unique insight into the minds of emerging hedge fund managers,' says VanthedgePoint Group founder and chief executive Geoffrey M. Tudisco. 'Academic studies indicate that early-stage hedge funds tend to outperform larger funds, and our survey allows us better to understand these managers' point of view when it comes to making investment decisions.'

Launched in 2006, VanthedgePoint aims to levelling the playing field between smaller emerging hedge funds and their multi-billion-dollar counterparts by providing economies of scale that deliver improved operational efficiencies and lower costs for its clients. The firm now offers a comprehensive solution comprising US and international equities, options and futures execution along with equity finance and operations outsourcing. The New York-based group operates three subsidiaries: VanthedgePoint Securities, a registered broker/dealer, VanthedgePoint Futures and VanthedgePoint Technologies.