Hedge Funds Return To Form
Thursday, August 12, 2010

Hedge fund returns, as measured by the major hedge fund indices, turned positive last month after several months of flat to negative performance for the industry, although the sector failed to capitalize on a strong advance in the equity markets.

The Greenwich Global Hedge Fund Index recouped losses experienced in June by returning 1.24% in July with nearly all Greenwich hedge fund strategy groups gaining during the month. Meanwhile, the Hennessee hedge fund index advanced 1.91% last month and the Eurekahedge Hedge Fund Index gained 1.42%. By comparison, the broader equity benchmarks had strong months; the S&P 500 Total Return gained 7.01%, the MSCI World Equity rose 8.01%, and the FTSE 100 returned 6.94%. Bonds advanced, as the Barclays Aggregate Bond Index increased 1.07%.

“Hedge funds as a whole moved higher in July but missed part of the upside move in equities,” said Clint Binkley, Senior Vice President, Greenwich Alternative Investments. “There is a divergence between better than expected corporate earnings and less than inspiring economic reports. Investor sentiment among hedge funds is very cautious and a result net exposure was rather low coming into the month. Most managers believe that the global economy is still on shaky ground.”

“Hedge fund managers lagged the broader markets due to defensive portfolio positioning," noted Lee Hennessee, Managing Principal of Hennessee Group. "Managers began July with lower than average exposures after significantly reducing gross and net exposure levels during May and June. As a result, hedge funds lagged as equity markets rose sharply."

“On a positive note, we are encouraged to see that performance was partially driven by stock selection, rather than only directional market exposure," Hennessee added. "Stocks started to respond more to fundamentals as quarterly earnings were reported, a constructive development for hedge funds.”

TrimTabs Investment Research and BarclayHedge reported on August 9 that the hedge fund industry posted an estimated outflow of USD3.7bn, or 0.2% of assets, in June 2010, following an inflow of USD4.9bn in May and an outflow of USD2.5bn in April. The industry posted negative returns of 3.2% in May and 1.1% in June.

“Redemptions probably persisted through July, and they could pepper the remainder of the year,” said Sol Waksman, founder and president of BarclayHedge. “Even if performance hadn’t been poor in May and June, July is historically one of the worst months of the year for fund subscriptions, and seasonality will be working against inflows through December.”

However, research by Preqin suggests that almost one-third (29%) of institutional investors intend to increase hedge fund investment over the next 12 months, although Preqin's study shows that fewer investors are satisfied with hedge fund performance than at the same point last year.

According to Preqin's survey of 50 global hedge fund investors from various institutions on their current hedge fund portfolios and their investment plans for the next 12 months, 37% of institutional investors intend to increase the number of relationships they have with hedge fund managers over the next 12 months. 53% intend to maintain the current number of funds they are invested with and 10% plan to reduce the number of managers they invest with. Over the longer term (three to five years), 46% of surveyed investors intend to increase their exposure to hedge funds. Just under 70% of investors feel that the hedge funds within their portfolios have either met or exceeded return expectations. This is a drop from 73% of investors in a similar survey conducted in 2009.

“Despite a slight drop in investor satisfaction in hedge fund returns over the past 12 months, institutional investors are beginning to invest more capital in hedge funds in greater numbers than they were a year ago," says Amy Bensted, Manager, Hedge Fund Data. "With 29% of institutional investors planning to allocate more capital to hedge funds in the next 12 months and just 15% looking to make cuts, the balance of inflows into the asset class is positive. Furthermore, 37% of institutional investors are planning to add new funds to their portfolio in the next 12 months and are actively seeking relationships with new fund managers."

"The long-term outlook for the asset class is even more positive," Bensted adds. "It is clear that institutional investors still believe hedge fund investments are a valuable part of their portfolios. Recovery in terms of asset flows into the industry has already begun and the Preqin survey suggests it is likely to increase steadily over the medium to long term."