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Funds of hedge funds stay wary, global macro leads


Date: Wednesday, September 2, 2009
Author: Khaleej Times Online

Funds of hedge funds managers remain cautious over the speed and sustainability of economic recovery but are inching back to optimism, a Reuters poll found.

Surging equity markets from the spring have helped hedge funds rebalance the books after severe losses last year, but while there is a growing sense that the worst of a global recession has past, many remain conservative.

A quarterly survey of 12 managers who invest in a basket of hedge funds with combined assets of close to $100 billion, showed 14 of 15 major strategies covered were expected to deliver at least average returns in either the third or fourth quarters.

That is up from 11 of 15 in a survey in May, and 3 of 15 in February when a full sense of recession gloom hung heavily over the hedge funds sector.

But even with a rally of 20 percent in MSCI’s all-country world stock index this year, only three strategies were seen delivering above average returns. They included a shift towards credit and fixed income strategies, as well as the ever popular global macro portfolios.

“We have become more constructive than 6-9 months ago but still keep in mind there are a lot of potential question marks that could result in a sell-off,” said Roman Berri, fund manager at AXA Investment Managers.

Yet he said any sell-off would not be steep and range trading for some time would be seen across equity markets.

The survey showed managers have bulked up exposure to fixed income and credit strategies. Fixed income markets have remained volatile partly as a result of central banks remaining active in the markets.

“In fixed income, FX and commodities we still see elevated levels of volatility and that is an area where we continue to see opportunities,” said Berri. He added that less leverage was needed to make decent returns in fixed income than 18-24 months ago as a result of ongoing volatility.

The survey showed allocations to global macro funds were also increased and were seen as the only ones likely to deliver above average returns in both quarters in the final half of the year. Hedge funds in general have enjoyed a much better year after recording a record loss of close to 20 percent in 2008 when investors pulled some $150 billion out of funds of funds. Indeed many are seeking to reinvent themselves.

The Funds of Funds Composite Index compiled by Hedge Fund Research has risen by close to 7.0 percent from the start of the year to the end of July.

The second quarter of the year was also the first quarter since the same period last year when hedge fund assets grew.

Global macro looks for exit signs

The dominant and favoured strategy continues to be global macro funds, the survey showed.

Such funds aim to profit from betting on the direction of markets, currencies and debt, and with huge amounts of fiscal and monetary stimulus yet to be withdrawn by governments and central banks, managers believe they are ripe for further returns.

“The key moment for global macro funds will be how they read the unwinding of fiscal and monetary stimulus. If they get the timing and consequences right, then global macro will post spectacular returns,” said Pau Morilla-Giner, senior fund manager at London & Capital.

Emerging markets have fared even better, driven by investors piling back into more risky asset classes as a recovery takes shape.

Yet the survey showed a significant divergence of opinion of just how much further the run could go on. HFR’s Emerging Markets index was already up close to 26 percent this year by the end of July.

The survey showed at least two of 11 managers investing in emerging markets thought they would deliver losses in the third and fourth quarters, while three thought they would continue to deliver very strong returns. The rest forecast average returns.

“If you really want to play the global economic recovery you’re going to need to go into the more cyclical emerging markets and not those that are more dependent on government stimulus,” said Morilla-Giner. China is executing a $586 billion stimulus package aimed at pushing the world’s third largest economy out of a global economic slump.