AIMA and Deutsche Bank publish hedge fund guide

The new Roadmap to Hedge Funds, published jointly by AIMA and Deutsche Bank, outlines how the volatile external environment has driven the greater need for active risk management. In re-affirming the case for investing in hedge funds, the Roadmap highlights how the industry responded to the losses of 2008. The average hedge fund recovered from its 2008 losses by October 2010, in contrast with global equities which are not expected to recover their financial crisis losses until at least 2015.

Andrew Baker, AIMA’s CEO, said: “AIMA has always worked closely with the investor community to promote greater understanding of hedge funds. We are not pretending that the last four years have been easy for the industry, but if anything in difficult times like this the case for assets to be actively managed by specialised managers with a variety of tools at their disposal is even more compelling,” he said echoing the findings of the report that the need for active risk management has increased over the past four years.

The report also highlights the long-term performance of hedge funds. A hypothetical investment in the S&P 500 Total Return Index of $100 at the beginning of the last decade stood at $121 by August 2012, while a hypothetical investment of $100 in the HFRI Fund Weighted Hedge Fund Index stood at $201, according to the analysis.

Hedge funds further demonstrated an ability to protect capital in periods of considerable market stress. Managed futures funds are found to have delivered a positive return in 18 out of 20 equity down-markets between 1980 and 2012. Even in the 10 worst quarters since 1990, a diversified hedge funds portfolio preserved capital better than a global equities portfolio, the report claims.

Another trend noted by Roadmap to Hedge Funds is the institutionalisation of the hedge fund market. Pension funds in particular are seeking hedge fund investments to diversify equity/bond portfolios and deliver superior risk adjusted returns. In response, hedge funds have become more transparent, better governed and better understood by institutional investors, the report said.

Anita Nemes, Global Head of Capital Introduction at Deutsche Bank, said: “Not only has the hedge fund industry undergone a rapid transformation over the past four years, but attitudes to hedge fund investing have changed just as much. An increasingly institutional investor base brings with it a new set of client demands, including greater transparency and improved reporting and risk management. The Roadmap to Hedge Funds provides the analysis and voice behind these fundamental changes to the industry.”

The original edition of the Roadmap to Hedge Funds was published in 2008, and was the world’s first collaborative educational guide for institutional investors in hedge funds. It aimed to de-mystify the industry by tackling misconceptions. In addition it offered guidance on creating and managing a hedge fund portfolio and gave an in-depth view of hedge fund strategies, valuation, leverage, liquidity and risk management.

Alexander Ineichen, founder of Ineichen Research and Management and author of the Roadmap reports noted the main differentiation between hedge funds and traditional asset management is risk management.

“Over the past four years an active risk management stance has resulted in a reduction of risk. The reason for more conservative risk taking is mainly a rise in uncertainty related to artificially enhanced asset prices and other forms of intervention,” he said. “The modest returns of hedge funds over the past four years are a direct result of taking less risk. In essence, hedge funds have done what they are designed to do, which is take risk off the table when uncertainty rises.”