Hedge fund inflows set to double

Date: Monday, March 11, 2013
Author: Mark Smith, Financial Standard

Record low bond yields and the return of global confidence should see inflows into alternative equity strategies more than double in 2013, according to PIMCO executive vice president Ryan Korinke.

The hedge fund expert, who is over from the US to meet investors, says that a 6% negative return across hedge fund strategies globally in 2011 saw inflows fall to US$33 billion in 2012.

However, with equity markets generally still unable to put together a lengthy period of strong returns and many commentators predicting an imminent bursting of the bond bubble, Korinke says institutional investors are looking to increase their exposure to alternative strategies, particularly in Australia.

"Appetite for hedge fund is growing because yields have come down so much in fixed income markets that investors are forced to look elsewhere," he said. "I wouldn't be surprised if inflows grew to US$75 billion this year."

He added that with the global economy showing signs of recovery, many institutions are reluctant to take risk off the table but are looking to alternative strategies to hedge out some of the risk of losing those gains.

While PIMCO predicts strong inflows into hedge fund assets globally, the uptake among institutional investors in Australia will be mixed. Some super funds have terminated hedge fund mandates in the past 12 months due to fund managers not delivering the returns they promised.

Korinke did say that double-digit returns that made hedge funds popular in the past will no longer be the norm.

"Investors have traditionally expected double digit returns from thier hedge strategies but with low returns on offer in most other asset classes institutions have been more willing to accept returns of 5%," he said.

Korinke went on to explain that macro hedge fund strategies, which performed so strongly in the aftermath of the GFC, may have had their day in the sun.

"Macro funds tend to be focused on fixed interest assets in the US, Germany and Japan, but yields falling close to zero has limited opportunities," he explained.

"Our research into monthly returns on global macro strategies showed that funds outperform by an average of 1% when interest rates are falling compared to when they are rising. I think that macro funds will really struggle at this point in the rate cycle."

PIMCO has a number of equity and fixed income hedge fund strategies available to both the Australian institutional and retail markets.