SEB positive on hedge funds

The Swedish bank SEB has “high return expectations” for hedge funds in 2010 and 2011 and is tipping global macro, managed futures and relative value funds to deliver the best returns in the next 12 months.

In its 2010 outlook for the hedge fund industry, SEB said the directional strategies that performed best in 2009, such as equity long/short funds, would find it harder to generate the same level of returns in the coming months.

These funds were able capture strong beta returns in 2009 by following the upward move in financial markets, SEB said.

"It is no longer possible to achieve easy beta returns, at least not to the same extent as in 2009. Looking ahead it will be substantially more important for investors to take advantage of qualitative funds that thoroughly hedge their downside and have very good control of their risk," noted the report.

SEB said qualitative macro funds were likely to do well in 2010 because they can choose form the full range of potential investments such as equities, fixed income, commodities and currencies. The bank also tipped managed futures as an attractive strategy because it tends to be long volatility.

SEB also has a positive view of relative value strategies and some fixed income strategies. However, the bank said the leverage in these strategies was a concern. "Due to their borrowing, some of these funds may be highly leveraged. But we are choosing to be very cautious about funds that have more than low normal borrowing since this may be dangerous, judging from the experiences of 2008," SEB said.

The performance of hedge funds generally is likely to be aided by the reduced number of funds in the market and less competition from the trading departments of banks, SEB added. However, the bank highlighted political and regulatory changes as potential threats to the industry.

"Political demands for more regulation may put pressure on hedge funds to improve trading cycles, transparency and reporting. This is of course good for investors, but there is also a flip side to the extent that this may limit the funds' potential for generating really good returns," SEB said in its paper.