Hedge funds perform well amid business model changes

Date: Monday, February 8, 2010
Author: Emily Perryman, HedgeWeek

Fitch Ratings says the hedge fund industry performed well in quarter four 2009 and experienced a return of net new money inflows.

The broad HFRI composite index was up 2.7 per cent in the quarter and 20 per cent over 2009.

Overall, 2009 saw the best hedge fund performance for a decade, according to Fitch's "Fund of Hedge Funds Quarterly - Q1 2010" newsletter.

The hedge fund industry is experiencing fundamental changes to its business model and in its relationship with investors.

"The development in 2009 of Ucits-compliant hedge funds, designed as a vehicle to provide both institutional and retail investors with a transparent and liquid access to alternative investments, has been interesting in that regard," says Aymeric Poizot (pictured), head of Fitch's EMEA fund and asset manager rating group.

Fitch observes that 2009 was dominated by top-down macroeconomic positioning, whereas bottom up, individual asset selection and pure relative value trades remained on the sidelines awaiting a clearer macroeconomic picture and more fundamentally driven market conditions.

In this context, the most successful individual strategies were convertible bond arbitrage, which profited on both the equity and credit sides, emerging market equities and distressed credit, with the latter taking advantage of steadily declining corporate credit spreads.

"However, in general hedge fund managers agree that 2010 is likely to prove more challenging," says Olivier Fines, associate director in Fitch's EMEA fund and asset manager rating group. "Most of the evident benefits from the massive stimulus packages - liquidity and sustained demand - have probably been realised already, sovereign risk is rising, the pulse of the economy and the profitability in certain sectors are still weak and several market segments are still subject to potential default risk. For these reasons, a return to fundamental analysis may well be on the cards for 2010."

Fitch notes funds of hedge funds suffered more than single-manager hedge funds from clients leaving alternative investments in 2008, and this continued into 2009 - largely because of their higher preponderance in high net worth client portfolios.

It so far remains unclear in early 2010 whether funds of hedge funds can recover and demonstrate their legitimacy as the vehicle of choice for investors seeking to invest in the hedge fund universe.

Funds of hedge funds have generally lagged hedge fund performance throughout 2009. However, Fitch believes that the use of risk-adjusted performance figures and the observation that funds of hedge funds returns show a higher consistency over time both support the perspective that these vehicles are practical providers of stable exposure (beta) to alternative investments.