Hedge funds cut back bets in tough May-Pictet

Date: Wednesday, May 26, 2010
Author: Reuters

Hedge funds have aggressively cut back bets in recent weeks during a difficult month that has seen the euro tumble and stock market volatility soar, said Pictet's head of alternative investments, Nicolas Campiche.

Hedge Funds

Hedge funds are now positioned defensively with lower levels of borrowing, said Campiche, who oversees more than $8 billion invested in portfolios of hedge funds.

He thinks global macro managers are best placed to profit from the turbulence.

"The first week of May was difficult," Campiche said in an interview late on Monday. "Since then managers have derisked quite aggressively. Like everyone, they don't have a clue where things are heading so they've reduced their balance sheet.

"Right now, leverage is very low," he added. "Funds are playing defence but there's no panic... Everyone is much more on their toes."

However, funds are still not as cautious as during the nadir of the credit crisis in late 2008 and early 2009, he added.

Hedge fund long leverage was just over 1.5 times in October 2008, according to data from Britain's Financial Services Authority, rising to 1.78 times by October 2009.

Campiche's comments come during a volatile month for stocks and currencies.

The VIX .VIX index of volatility has doubled between the end of April and last week, following the Dow Jones's .DJI temporary slump in the first week of May and a slump in the euro on worries over the debt of southern European countries.

Hedge funds are already losing money this month as despite constant publicity around short-selling activities, most are often positioned to benefit more from market rises than falls.

According to Hedge Fund Research's HFRX index, funds are down 2.91 percent from the start of the month to May 20, more than wiping out their gains this year. Equity hedge funds are down 4.48 percent.

With the FTSE 100 .FTSE down 2.5 percent at 1206 GMT on Tuesday, further losses look likely.

UNCERTAINTY TO PREVAIL

Campiche said he is backing global macro funds -- which bet on currencies, stocks, bonds and commodities -- to profit in the current turbulence.

"We think markets will continue to be dominated by political and macro events. The managers best positioned to analyse and react are global macro managers," he said.

"We think uncertainty will prevail in markets and economies, which will lead to high volatility, which is a positive for global macro."

He also likes long-short equity funds that focus on company fundamentals and that can profit both from share price rises and falls.

"We like long-short. We think there will be more opportunity to create alpha than in 2008 or 2009, when the market tended to move as a whole. We have a feeling investors will pay more attention to company fundamentals."

Campiche said his fund of hedge funds is up 2 percent so far this year, after a 16 percent loss in 2008 and a 14 percent gain last year.