Hedge Funds Ride Out Uncertain Markets
Tuesday, August 16, 2011

On the back of strong inflows, hedge funds generally came out ahead last month while equities fell. However, given the recent bloodbath in the equity markets, the outlook for returns looks far from certain.

Hedge funds as measured by the Greenwich Global Hedge Fund Index (GGHFI) posted mixed results among strategies but generally finished the month with gains. The GGHFI advanced 0.67% while the S&P 500 Total Return declined 2.03%, the MSCI World Equity fell 1.89%, and the FTSE 100 lost 2.20%. Over half (56%) of constituent funds in the GGHFI ended the month with gains.

“Hedge funds turned in an excellent month of relative performance when compared to equity and fixed income benchmarks,” notes Clint Binkley, Senior Vice President. “Results from Long-Short Equity and Directional Trading managers show that funds were prepared for market declines. We continue to expect hedge funds to outperform long only strategies in this volatile market environment.”

According to Greenwich, Managed Futures and Global Macro funds lead hedge fund strategies, gaining 3.04% and 2.19%, respectively last month. Meanwhile, Long-Short Equity managers declined 28 basis points, but Greenwich pointed out that this represents "a fraction of global equity index moves". Developed market funds slightly outperformed Emerging Market managers last month, with the Developed North America strategy coming out on top with a gain of 2.5%. Managers betting on Emerging Markets Latin America were the biggest losers last month, this strategy returning -2.28%.

A mixed month for the hedge fund sector was largely confirmed by the Dow Jones Credit Suisse Core Hedge Fund Index, which finished up 0.20% for the month with three out of seven sectors posting positive performance. Oliver Schupp, President of Credit Suisse Index Co., LLC said that Managed Futures experienced the most significant rebound, gaining 3.61% as long commodity and equity positions resulted in gains mid-month.

Interestingly, Emerging Markets was the next-best performing strategy, returning 1.2% last month. By comparison, the Greenwich Emerging Markets Composite Index returned just 0.38% in July.

Despite inconsistent returns from the hedge fund sector this year, inflows appear to be holding steady, with data from BarclayHedge and TrimTabs Investment Research showing that hedge fund industry took in USD3.8bn in June, the sixth straight inflow as well as the 11th in 12 months.

“Investors were very kind to hedge funds in the first half of the year,” says Sol Waksman, founder and President of BarclayHedge. “The industry raked in USD73.0bn (4% of assets), which goes down as the heaviest first-half inflow since 2007."

However, Waksman doubts that such levels of inflows will be maintained in the second half of the year, in light of the recent "bloodbath" in equities.

The BarclayHedge/TrimTab report shows that fixed Income hedge funds hauled in USD15.1bn (7.9% of assets) in the first half of 2011, the second-heaviest inflow of all hedge fund strategies. These funds have seen inflows in 13 of the past 14 months and returned 4.9% in the first half of the year, the second-best performance of all strategies. Multi-Strategy hedge funds attracted USD15.2bn (7.2% of assets) in the first half of 2011, the heaviest inflow of all hedge fund strategies, even though they posted a mediocre return. Similarly, Macro funds and Emerging Markets funds posted two of the heaviest inflows despite turning in the two worst performances of all hedge fund strategies.

“We see lopsidedness between performance and flows regularly in not only our hedge fund flow data but also our retail and institutional flow data,” notes Minyi Chen, Vice President of Quantitative Research at TrimTabs. “These imbalances are predictive more often than not. We believe investors should consider investment candidates that are performing well but not attracting heavy inflows. Similarly, we fear any asset class into which investors keep flocking despite poor returns.”