Hedge Funds to Stem Losses in 2009, GFIA’s Peter Douglas Says

Date: Friday, December 19, 2008
Author: Tomoko Yamazaki, Bloomberg

Hedge funds, on course for the worst year on record, will stem losses in 2009 as managers of equity long-short funds and macro funds attract investors, Peter Douglas, principal of hedge-fund consulting firm GFIA Pte said.

Managers of credit strategies may also outperform because a dearth of available credit from banks will create a niche opportunity, said Douglas, also the chairman of the Asia chapter of the Alternative Investment Management Association.

While the industry has lost more than a fifth of its assets from the peak of $1.9 trillion in June in the worst market turmoil since the Great Depression, hedge funds have on average outperformed global benchmarks. They declined 18 percent on average through Nov. 30, compared with a 44 percent slide in the MSCI World Index in the period.

“We had all sort of bad stuff going around, but in the end, you’ve been far better being in hedge funds than anywhere else, except for keeping your cash under the bed,” said Douglas in a telephone interview Dec. 17. “I don’t think that the deleveraging process is completely finished and we will see some more next year, but the bulk of it has happened already.”

Global stock markets have lost 46 percent of their value to $32 trillion in 2008 year as the credit crisis sent the U.S., Europe and Japan into the first simultaneous recession since World War II.

Distressed selling and the rollback of debt-funded investments pulled down hedge funds, forcing more than 80 firms to liquidate funds, segregate assets or limit withdrawals. The 18 percent drop in hedge fund performance is the most in a year since Chicago-based Hedge Fund Research Inc. began tracking the data in 1990.

Major Risks

“The major risk is poor government policy and execution that may result in the economy really entering a depression,” said Eiichiro Kuwana, president of Cook Pine Capital LLC, the Greenwich, Connecticut-based asset management firm specializing in alternative assets. “Another risk is that inflation comes back faster and more furious than what is being discounted currently, hence stagflation in the developed economies.”

The slide in global stock prices will present opportunities for managers of so-called long-short funds, who bet on rising and falling stock prices, Douglas said.

Long-short funds with assets between $200 million to $400 million in Asia are the best placed to take advantage of these opportunities, Douglas said, adding that smaller funds may face difficulty in generating revenue to support the analysis needed to make the right stock picks.

‘Counter Intuitive’

The Eurekahedge Long/Short Equities Hedge Fund Index has slumped 21 percent this year through November, underperforming the 13 percent slide by the global hedge fund index that the Singapore-based data provider publishes.

“Counter intuitively, I think that long-short equity will actually do rather well,” Douglas said. “The dispersion in valuation is extraordinary and scale is important.”

Macro-fund managers, who wager on trends in stocks, bonds and currencies worldwide, are also set to gain, extending this year’s performance, Douglas added.

The Eurekahedge index tracking macro managers is down 0.7 percent this year through November, and the second-best performer among nine different strategies after the index tracking managers who trade futures, known as commodity trading advisers or CTAs.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net