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2012 could be good year for hedge funds despite volatility, says HFR's Heinz

Date: Monday, December 12, 2011
Author: Martin Leonard, COO Connect

Hedge funds have reason to be optimistic in 2012 despite the ongoing market volatility, Kenneth Heinz, president of Hedge Fund Research (HFR) has claimed.

According to HFR’s data, hedge funds are launching at a rate not seen since 2007. Despite this, hedge fund liquidations rose to 213, the highest total since the first quarter of 2010 which saw 240 funds close their doors. HFR revealed the average hedge fund has lost 4.37% this year. Several high-profile managers have suffered in these bearish markets including John Paulson whose Advantage Plus fund is down 46%. Markets have been incredibly volatile since summer with US economic growth stuttering and serious uncertainties about the eurozone. Furthermore, several emerging economies including China, Brazil and India are experiencing slowing growth. This does not bode well for managers.

However, HFR president Kenneth Heinz (pictured) remains positive. “There is a huge amount of disarray in the financial markets and the biggest driver is obviously the events unfolding in the eurozone over the status of European sovereign debt. However, with challenges come opportunities and distressed economic environments can be an excellent time for hedge funds to launch. I believe investors are going to display less risk aversion in 2012. Furthermore, I reckon global regulators and politicians will make progress and eventually help calm the markets,” he said.

Macro funds represented almost 35% of all single manager launches over the last two quarters with the strategy producing positive albeit modest returns for investors. The HFRI Macro Index posted an uncorrelated gain of 0.15% during the third quarter while the HFRI Fund Weighted Composite Index dropped 6.65%.

“Global macro will enjoy success in the short-term although I am positive about the future of equity hedge in the mid-term even though equity-focused hedge funds had poor returns in 2011. However, many equity hedge funds navigated the volatile markets. It is important to note that the Dow Jones and FTSE have been fluctuating daily by over 100 points. I genuinely believe European equities will recover once the debt crisis is fully resolved,” said Heinz.

The dispersion between the best and worst performing hedge funds also increased with the top performance decile of all hedge funds returning 11.5% while the bottom decile showed declines of 27.5% producing a top-bottom decile dispersion of almost 39% - double the 19% dispersion witnessed in the second quarter. “This is definitely a marked improvement on the 100% differences we saw during 2008 and 2009 nevertheless,” said Heinz.

New hedge fund launches too offered investors lower management and performance fees. Average management fees declined 3 basis points (bps) to 1.58% while performance fees dropped to 17.04% - more than 100 bps lower than what the average hedge fund launched in 2010 charged. There has been widespread pressure on the traditional 2 and 20 management and performance fee from investors, who have been critical of hedge fund performance since the crisis. “A lot of managers who are untried and untested without an adequate track record will have to bow to investor demands on fees, especially as it is tricky to attract capital,” he said.