S&P rated FoHF make money in difficult times

Funds of hedge funds (FoHF) rated by Standard & Poor’s Fund Services made money in the third quarter despite concern in the markets over the ongoing credit crunch. Research just published shows that in aggregate the S&P rated FoHF returned around 1%, outpacing hedge funds which lost an estimated 1-1.5%.

“After a strong first half, the nine months to end September are now comfortably in double digits and October was another good month,” said S&P Fund Services lead analyst Randal Goldsmith.

“One feature that has been working well for rated funds has been the selection of hedge fund managers who have made money on their short positions,” said Goldsmith, citing the example of Turnstone European fund, where the largest position is in the Lansdowne UK Equity fund. This made about 10% in the difficult conditions of August, after shorting the shares of house-builders and financials, including Northern Rock. Jupiter Merlin Absolute Return fund also benefited from a significant holding in Lansdowne Global Financials fund, which did even better, returning 11% in August.

“It is reassuring that investors remained confident during a period in which bad news flowed like water from an open tap,” said Goldsmith. “However, a fly in the ointment is that almost all of the net inflows have ended up in one segment: emerging markets/Asia focused strategies.”

A side effect of the turmoil in the financial markets has been increased insistence on transparency from many FoHF. Goldsmith highlighted Cedar Fund, where a senior manager summed up the views of many, saying: “If a (hedge fund) manager is not being open with its investors during a difficult time that is unacceptable because, at the end of the day, it is our investors’ money.”

Looking ahead, S&P rated funds of hedge fund managers are fairly unanimous in their enthusiasm for emerging markets and Asia.

S&P Fund Services’ Goldsmith said: “It is somewhat ironic that FoHF managers should currently have their highest conviction on geographical markets and sectors rather than a particular hedge fund strategy. In fairness, their optimism on emerging markets/Asia and caution on the US is more than a market call. It also reflects their view that there are more opportunities for exploiting inefficiencies in emerging economies than developed markets and the US in particular”.