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Institutional investors continue to deepen their commitment to hedge funds, but expect much more from managers in terms of articulating their value proposition, risk mitigation methodology, and performance expectations, according to the fifth annual global study released today by SEI (NASDAQ: SEIC) in collaboration with Greenwich Associates. The report, entitled “The Shifting Hedge Fund Landscape: Institutions Put Fund Managers to the Test,” indicates a need for hedge fund managers to help clients clearly understand their investment strategies, performance expectations, and the tradeoffs between risk and reward to maintain investor confidence and attract new capital.
The study results found that institutional investors’ allocation in hedge funds continues to rise, as more than a third (38 percent) of all survey respondents said they plan to increase target allocations over the next 12 months. While that number is lower than in past years, it comes on top of a 54 percent increase in 2010. At the same time, hedge fund allocations represent a greater share of respondents’ overall portfolios, at nearly 18 percent, up from 12 percent in 2008. When asked why they invest in hedge funds, absolute return was named as the top objective by nearly a third of respondents, passing non-correlated investment strategies as the top priority.
“Although returns are understandably a top objective, risk management also remains at the front of investors’ minds,” said Rodger Smith, Managing Director of Greenwich Associates. “Three of the top four goals named by respondents— accessing non-correlated strategies, diversification, and lowering volatility —address investment risks. This suggests that institutions today use hedge funds to help them lower portfolio risks in addition to boosting returns.”
“The study shows that investors want the best of both worlds when it comes to hedge fund investing – better returns, as well as lower correlations and better overall management of risk,” said Ross Ellis, Vice President, Knowledge Partnership for SEI’s Investment Manager Services division. “To differentiate themselves, managers must articulate the strategy and processes they are using to generate returns, and clearly explain to their investors how they are mitigating risk. In the Era of the Investor™, investors need to be involved and confident in the overall investing process, while pushing towards institutional standards.”
Reinforcing the demand for more understandable, less opaque strategies, the overwhelming majority of respondents (82 percent) named long/short equity among the top three strategies they presently employ, followed by event-driven and credit, named by 53 percent and 42 percent, respectively. Only a small group (15 percent) said they intend to divert some share of hedge fund allocations to regulated products such as alternative mutual funds or UCITS in the coming year.
The report also noted that while average annualized returns are down to 6 percent from 9 percent in 2010, only about 7 percent of investors polled reported any level of dissatisfaction with their returns. The survey points to some concern related to hedge fund performance, as investors were split, by a margin of 41-to-25 percent, on the question of whether they would be able to meet return objectives without having hedge funds in their toolkits. Also of note is the fact that direct hedge fund investing continues to gain momentum, as 40 percent of investors said they invest solely via single-manager funds, up from 24 percent in 2010. More than half (56 percent) of respondents with more than $5 billion in assets said they use single-manager funds exclusively.
The white paper is published by the SEI Knowledge Partnership, which provides ongoing business intelligence and guidance to SEI’s investment manager clients. To request the full paper, visit http://www.seic.com/2012HedgeResearch.
Tuesday, January 24, 2012
Wednesday, January 18, 2012
UP TO $400 BILLION OF MONEY ‘IN PLAY’ FOR HEDGE FUNDS IN 2012
The hedge fund industry faces challenges in 2012, but also a year of significant opportunity, according to a Barclays Capital report, The Money Trail, released today.
The report contains analysis based on a survey of 165 investors conducted at the firm’s recent Prime Services Hedge Fund Symposium hosted in New York, as well as one-on-one investor interviews and other industry analysis. The surveyed investors manage approximately $4 trillion in assets under management (AUM), of which approximately $500 billion is allocated to hedge funds. This represents one quarter of the hedge fund industry’s total AUM.
With an uncertain macro economic environment ahead and the recent volatility in global markets, hedge fund investors plan on making considerable changes over the coming year. However, some of these changes will present significant opportunities for hedge funds, with 56% of the surveyed investors planning to increase their hedge fund allocations over the next twelve months, more than seven times the number that plan to decrease their allocations. Endowments and foundations, private banks and public pensions are the most likely allocators of new capital to hedge funds in 2012.
“Our analysis indicates that investors are likely to allocate approximately $80 billion of new capital to the hedge fund industry this year,” said Ajay Nagpal, Head of Prime Services at Barclays Capital. “2012 has the potential to be the most significant year for new capital allocations to hedge funds since 2007.”
In addition to the approximately $80 billion of new assets, investors are likely to reallocate some $300 billion of existing hedge fund assets within and across hedge fund strategies. In total, the hedge fund industry could see between $350 billion and $400 billion of money ‘in play’ over the next twelve months – almost one fifth of the current total hedge fund industry AUM.
Of the new flows, investors plan to allocate most to global macro and systematic / volatility strategies, as they look to add more tactical and trading-oriented strategies with relatively low correlation to equities. Reallocations will be most significant within equity and credit strategies, reflecting a combination of investors’ redemptions from poor performers, their belief in mean reversion and a preference for more specialized products within these strategies.
Pendulum Swinging Toward Smaller Managers
Based on investor preferences, the trend of an increasing share of allocations going to funds with less than $1 billion in AUM is set to continue in 2012. During the first nine months of 2011, small hedge funds doubled their share of new flows, compared to full year 2010 (18% of total hedge fund net flows vs. 9%). For 2012, that trend is likely to continue, with investors indicating a 77 percentage point tilt in favor of allocating to small funds. This compares with only a 10 percentage point tilt toward increasing allocations to large funds (AUM>$5bn).
“Smaller managers are frequently seen by investors to be more agile in adapting their existing strategies to generate alpha,” said Louis Molinari, Head of Capital Solutions in Prime Services at Barclays Capital. “With the greater transparency, and better fee and liquidity terms that many new and smaller funds offer, investors continue to gain confidence with investing in this segment of the hedge fund industry.”
Other key trends identified in The Money Trail include:
• Investor diversification across hedge fund managers continues
- 60% of investors plan to increase the number of managers in their portfolio compared to 25% who
plan to maintain current levels and 15% who plan to reduce them.
- 40% of investors plan to both increase their allocation to hedge funds as well as the number of
managers in their portfolios, compared to only 1% who plan to cut both.
• Liquidity remains a top investor priority
- some 90% of current hedge fund allocations have been to funds that had either no initial lock-up or
only a one-year lock up.
- the majority of investors who are looking to make changes to their liquidity profile want to increase
allocations to more liquid strategies.
Barclays Capital’s Prime Services business provides clients across the globe with a cross-asset class offering for financing, clearing and execution. The firm offers unique frameworks for asset protection, margining solutions, industry intelligence and insight, analytics and execution technologies. Barclays Capital has been recognized for its leadership in numerous industry polls and surveys, including 113 Best in Class Awards in Global Custodian’s 2011 Prime Brokerage survey, 130 Best in Class Awards in Global Custodian’s 2011 OTC Derivatives Prime Brokerage survey, and Best Prime Broker Technology provider at HFMWeek’s 2011 US Service Provider awards.
Notes
The findings of The Money Trail are based on the responses of a relatively small number of investors, and may not be representative of the entire hedge fund industry.
The report contains analysis based on a survey of 165 investors conducted at the firm’s recent Prime Services Hedge Fund Symposium hosted in New York, as well as one-on-one investor interviews and other industry analysis. The surveyed investors manage approximately $4 trillion in assets under management (AUM), of which approximately $500 billion is allocated to hedge funds. This represents one quarter of the hedge fund industry’s total AUM.
With an uncertain macro economic environment ahead and the recent volatility in global markets, hedge fund investors plan on making considerable changes over the coming year. However, some of these changes will present significant opportunities for hedge funds, with 56% of the surveyed investors planning to increase their hedge fund allocations over the next twelve months, more than seven times the number that plan to decrease their allocations. Endowments and foundations, private banks and public pensions are the most likely allocators of new capital to hedge funds in 2012.
“Our analysis indicates that investors are likely to allocate approximately $80 billion of new capital to the hedge fund industry this year,” said Ajay Nagpal, Head of Prime Services at Barclays Capital. “2012 has the potential to be the most significant year for new capital allocations to hedge funds since 2007.”
In addition to the approximately $80 billion of new assets, investors are likely to reallocate some $300 billion of existing hedge fund assets within and across hedge fund strategies. In total, the hedge fund industry could see between $350 billion and $400 billion of money ‘in play’ over the next twelve months – almost one fifth of the current total hedge fund industry AUM.
Of the new flows, investors plan to allocate most to global macro and systematic / volatility strategies, as they look to add more tactical and trading-oriented strategies with relatively low correlation to equities. Reallocations will be most significant within equity and credit strategies, reflecting a combination of investors’ redemptions from poor performers, their belief in mean reversion and a preference for more specialized products within these strategies.
Pendulum Swinging Toward Smaller Managers
Based on investor preferences, the trend of an increasing share of allocations going to funds with less than $1 billion in AUM is set to continue in 2012. During the first nine months of 2011, small hedge funds doubled their share of new flows, compared to full year 2010 (18% of total hedge fund net flows vs. 9%). For 2012, that trend is likely to continue, with investors indicating a 77 percentage point tilt in favor of allocating to small funds. This compares with only a 10 percentage point tilt toward increasing allocations to large funds (AUM>$5bn).
“Smaller managers are frequently seen by investors to be more agile in adapting their existing strategies to generate alpha,” said Louis Molinari, Head of Capital Solutions in Prime Services at Barclays Capital. “With the greater transparency, and better fee and liquidity terms that many new and smaller funds offer, investors continue to gain confidence with investing in this segment of the hedge fund industry.”
Other key trends identified in The Money Trail include:
• Investor diversification across hedge fund managers continues
- 60% of investors plan to increase the number of managers in their portfolio compared to 25% who
plan to maintain current levels and 15% who plan to reduce them.
- 40% of investors plan to both increase their allocation to hedge funds as well as the number of
managers in their portfolios, compared to only 1% who plan to cut both.
• Liquidity remains a top investor priority
- some 90% of current hedge fund allocations have been to funds that had either no initial lock-up or
only a one-year lock up.
- the majority of investors who are looking to make changes to their liquidity profile want to increase
allocations to more liquid strategies.
Barclays Capital’s Prime Services business provides clients across the globe with a cross-asset class offering for financing, clearing and execution. The firm offers unique frameworks for asset protection, margining solutions, industry intelligence and insight, analytics and execution technologies. Barclays Capital has been recognized for its leadership in numerous industry polls and surveys, including 113 Best in Class Awards in Global Custodian’s 2011 Prime Brokerage survey, 130 Best in Class Awards in Global Custodian’s 2011 OTC Derivatives Prime Brokerage survey, and Best Prime Broker Technology provider at HFMWeek’s 2011 US Service Provider awards.
Notes
The findings of The Money Trail are based on the responses of a relatively small number of investors, and may not be representative of the entire hedge fund industry.
Fund Manager Survey Finds Gloom Lifting Over Global Growth Prospects
Global investors have started 2012 with a reawakened sense of optimism towards the global economy and greater appetite for risk, according to the BofA Merrill Lynch Survey of Fund Managers for January.
“Despite improvement in global and European growth expectations asset allocators remain deeply skeptical towards European equities, especially banks”
The global survey of 214 institutional investors shows far fewer predicting a global slowdown. Only a net 3 percent believe the world economy will weaken in the coming 12 months down from a net 27 percent in December – the biggest one-month improvement in the growth outlook since May 2009.
Many investors are showing more appetite to take risk. BofA Merrill Lynch’s Composite Risk and Liquidity Indicator is the highest since July 2011, before the sovereign debt crisis fully emerged. Cash levels have fallen to their lowest levels since July 2011. Cash now makes up, on average, 4.4 percent of a portfolio, down from 4.9 percent in December. The proportion of investors taking lower than normal levels of risk has improved to a net 33 percent of the panel, compared to a net 42 percent in December.
One concern that investors have highlighted is geopolitical risk. The proportion of respondents viewing geopolitical risk as “above normal” has jumped to 69 percent from 48 percent last month. This has, in the past, been correlated with a spike in the oil price.
“Investors are tip-toeing rather than hurtling toward higher risk exposure; the U.S. market and high quality cyclical sectors, such as energy and tech, have been the main beneficiaries of lower cash holdings,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. “Despite improvement in global and European growth expectations asset allocators remain deeply skeptical towards European equities, especially banks,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
Corporate outlook improves and demands for investment rise
Fears of a global corporate profit slowdown still exist but have receded in the past month. While a net 21 percent of the panel still expects profits worldwide to deteriorate in 2012, that’s sharply lower than the net 41 percent taking the view in December. The proportion of the panel expecting corporate earnings growth to be under 10 percent has fallen to a net 42 percent from a net 60 percent.
Investors are returning to the view that corporate need to invest more. A net 55 percent of respondents say that corporates are underinvesting, the highest reading in 10 months. A net 37 percent of the panel believes that corporate are “underleveraged,” up from a net 31 percent in December.
Gulf between U.S. and Europe remains
The gulf between the U.S. and Europe as a preferred investment location remains, although some of the more wildly negative views towards Europe have eased. A net 56 percent of the global panel believes that the outlook for corporate profits is more favorable in the U.S. than any other region, up from a net 50 percent in December. A net 70 percent say the profit outlook for the eurozone is the least favorable of all regions, compared with a net 72 percent a month ago.
Asset allocators have further increased their exposure to U.S. equities. A net 28 percent are overweight U.S. equities, up from a net 23 percent in December. A net 31 percent remain underweight eurozone equities, an improvement from a net 35 percent a month ago but the second-worst reading on record.
Tech regains prime position; U.S. investors less bearish on banks
Technology has regained its status as the most favored global sector, highlighting the uptick in risk appetite after the defensive positioning at the end of 2011. The net percentage of investors overweight technology rose to 39 from a net 31 percent in December, overtaking Pharmaceuticals.
U.S. fund managers are returning to banks while Europeans continue to reject them. The proportion of U.S. fund managers underweight banks has fallen to a net 16 percent from 32 percent last month. European fund managers have extended their underweights – a net 50 percent are underweight banks.
Hedge fund leverage falls to lowest in 17 months
Hedge Funds reduced their leverage this month to the lowest level since August 2010. The weighted average ratio of gross asset to capital has fallen to 1.22 from 1.41 in December. This fall follows six months in which leverage had remained high in spite of wider market volatility.
Survey of Fund Managers
An overall total of 286 panelists with US$818 billion of assets under management participated in the survey from 6 to 12 January. A total of 214 managers, managing US$655 billion, participated in the global survey. A total of 144 managers, managing US$336 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.
“Despite improvement in global and European growth expectations asset allocators remain deeply skeptical towards European equities, especially banks”
The global survey of 214 institutional investors shows far fewer predicting a global slowdown. Only a net 3 percent believe the world economy will weaken in the coming 12 months down from a net 27 percent in December – the biggest one-month improvement in the growth outlook since May 2009.
Many investors are showing more appetite to take risk. BofA Merrill Lynch’s Composite Risk and Liquidity Indicator is the highest since July 2011, before the sovereign debt crisis fully emerged. Cash levels have fallen to their lowest levels since July 2011. Cash now makes up, on average, 4.4 percent of a portfolio, down from 4.9 percent in December. The proportion of investors taking lower than normal levels of risk has improved to a net 33 percent of the panel, compared to a net 42 percent in December.
One concern that investors have highlighted is geopolitical risk. The proportion of respondents viewing geopolitical risk as “above normal” has jumped to 69 percent from 48 percent last month. This has, in the past, been correlated with a spike in the oil price.
“Investors are tip-toeing rather than hurtling toward higher risk exposure; the U.S. market and high quality cyclical sectors, such as energy and tech, have been the main beneficiaries of lower cash holdings,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. “Despite improvement in global and European growth expectations asset allocators remain deeply skeptical towards European equities, especially banks,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
Corporate outlook improves and demands for investment rise
Fears of a global corporate profit slowdown still exist but have receded in the past month. While a net 21 percent of the panel still expects profits worldwide to deteriorate in 2012, that’s sharply lower than the net 41 percent taking the view in December. The proportion of the panel expecting corporate earnings growth to be under 10 percent has fallen to a net 42 percent from a net 60 percent.
Investors are returning to the view that corporate need to invest more. A net 55 percent of respondents say that corporates are underinvesting, the highest reading in 10 months. A net 37 percent of the panel believes that corporate are “underleveraged,” up from a net 31 percent in December.
Gulf between U.S. and Europe remains
The gulf between the U.S. and Europe as a preferred investment location remains, although some of the more wildly negative views towards Europe have eased. A net 56 percent of the global panel believes that the outlook for corporate profits is more favorable in the U.S. than any other region, up from a net 50 percent in December. A net 70 percent say the profit outlook for the eurozone is the least favorable of all regions, compared with a net 72 percent a month ago.
Asset allocators have further increased their exposure to U.S. equities. A net 28 percent are overweight U.S. equities, up from a net 23 percent in December. A net 31 percent remain underweight eurozone equities, an improvement from a net 35 percent a month ago but the second-worst reading on record.
Tech regains prime position; U.S. investors less bearish on banks
Technology has regained its status as the most favored global sector, highlighting the uptick in risk appetite after the defensive positioning at the end of 2011. The net percentage of investors overweight technology rose to 39 from a net 31 percent in December, overtaking Pharmaceuticals.
U.S. fund managers are returning to banks while Europeans continue to reject them. The proportion of U.S. fund managers underweight banks has fallen to a net 16 percent from 32 percent last month. European fund managers have extended their underweights – a net 50 percent are underweight banks.
Hedge fund leverage falls to lowest in 17 months
Hedge Funds reduced their leverage this month to the lowest level since August 2010. The weighted average ratio of gross asset to capital has fallen to 1.22 from 1.41 in December. This fall follows six months in which leverage had remained high in spite of wider market volatility.
Survey of Fund Managers
An overall total of 286 panelists with US$818 billion of assets under management participated in the survey from 6 to 12 January. A total of 214 managers, managing US$655 billion, participated in the global survey. A total of 144 managers, managing US$336 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.
Thursday, January 12, 2012
Eurekahedge Hedge Fund Index flat in December; down 4.16% at year end 2011
The Eurekahedge Hedge Fund Index was down 0.21%1 in December as volatile market conditions continued into the last month of the year. The index was down 4.16% for the year, making it the 2nd worst yearly return on record. Hedge funds still outperformed the underlying markets, however. This outperformance was led by larger hedge funds, as evidenced by the capital-weighted Mizuho-Eurekahedge Top-100 Index, which was up 2.01% in 2011. The MSCI World Index2 was down 0.4% in December and 9.9% for the year.
Key highlights for December 2011:
• 2011 was the 2nd worst year on record with the Eurekahedge Hedge Fund Index down 0.21% in December and 4.16% in 2011.
• The asset-weighted Mizuho-Eurekahedge Top-100 Index finished the year with gains of 2% showing that the larger funds performed better than the overall industry.
• Total asset flows for the year were US$67 billion, taking the size of the industry to US$1.72 trillion.
• Launch activity remained strong throughout 2011 with more than 1,100 funds launches in the year (the 2nd highest total on record) - capital raising remains as tough as it ever has been however.
• Latin American hedge funds provided the best returns for the year: up 2.84%.
• Fixed income and arbitrage were the best performing strategies for the year – up 1.19% and 0.71% respectively.
• Japanese hedge funds outperformed the Topix by 17.9% in 2011.
• The Eurekahedge Long Only Absolute Return Fund Index witnessed its fourth annual decline in 2011, down 13.63% for the year.
• Relative value hedge funds witnessed the largest percentage increase in AuM (year-on-year) during 2011, with gains of 20% for the year.
• CTA/managed futures funds and macro hedge funds attracted the most money from investors in 2011, gaining US$19 billion and US$16 billion respectively in net positive asset flows.
• Distressed debt hedge funds saw the best returns in 4Q 2011, gaining an relatively impressive 2.69%.
• Long/short equity funds were the worst performers during 2011, as they saw losses of 7.43%
Key highlights for December 2011:
• 2011 was the 2nd worst year on record with the Eurekahedge Hedge Fund Index down 0.21% in December and 4.16% in 2011.
• The asset-weighted Mizuho-Eurekahedge Top-100 Index finished the year with gains of 2% showing that the larger funds performed better than the overall industry.
• Total asset flows for the year were US$67 billion, taking the size of the industry to US$1.72 trillion.
• Launch activity remained strong throughout 2011 with more than 1,100 funds launches in the year (the 2nd highest total on record) - capital raising remains as tough as it ever has been however.
• Latin American hedge funds provided the best returns for the year: up 2.84%.
• Fixed income and arbitrage were the best performing strategies for the year – up 1.19% and 0.71% respectively.
• Japanese hedge funds outperformed the Topix by 17.9% in 2011.
• The Eurekahedge Long Only Absolute Return Fund Index witnessed its fourth annual decline in 2011, down 13.63% for the year.
• Relative value hedge funds witnessed the largest percentage increase in AuM (year-on-year) during 2011, with gains of 20% for the year.
• CTA/managed futures funds and macro hedge funds attracted the most money from investors in 2011, gaining US$19 billion and US$16 billion respectively in net positive asset flows.
• Distressed debt hedge funds saw the best returns in 4Q 2011, gaining an relatively impressive 2.69%.
• Long/short equity funds were the worst performers during 2011, as they saw losses of 7.43%
HEDGE FUNDS CONCLUDE CHALLENGING 2011, POSITION FOR 2012
HFRI Fund Weighted Composite posts calendar year decline for only third time since 1990;
Relative Value Arbitrage strategies post gains while Equity Hedge, Emerging Markets trail
Hedge funds concluded a challenging 2011 with a decline in December, as the HFRI Fund Weighted Composite Index declined by -0.18 percent, bringing full year 2011 performance to -4.8 percent, according to data released today by HFR (Hedge Fund Research, Inc.), the leading provider of data, indices and analysis of the global hedge fund industry. The decline for 2011 marks only the third calendar year decline since HFR’s index performance inception in 1990, but is the second decline in the last four years. Hedge funds produced a gain of +1.3 percent in 4Q11, following a sharp decline of -6.7 percent in the volatile 3Q; hedge funds gained +0.77 percent in 1H11.
Two of the four strategy areas ended 2011 with gains in December, including Macro (+0.16 percent) and Relative Value Arbitrage (+0.50 percent) strategies; Fixed Income-based Relative Value was the only strategy area of positive performance for full-year 2011, gaining +0.55 percent, while Macro declined by -3.6 percent. Event Driven posted a narrow decline of -0.01 percent in December and -2.65 percent for 2011.
Equity Hedge strategies were the weakest area of performance for both December and 2011, posting a decline of -0.66 percent in December, and concluding 2011 with a decline of -8.0 percent. Performance of Equity Hedge was undermined by weakness in Energy/Basic Materials, Emerging Markets and Fundamental Growth, which posted full-year declines of -16.75, -12.9 and -12.6 percent, respectively. Partially offsetting these declines, certain Equity Hedge sub-Hed ge Fund Research strategies posted 2011 gains, including Technology/Healthcare (+1.14 percent) and Short Bias (+1.0).
“Volatile and unpredictable market dynamics throughout the year created a challenging environment for hedge funds in 2011, with aggregate losses across currency, commodity, Emerging Markets and equity strategies related to the European currency and sovereign debt crisis,” stated Kenneth J. Heinz, President of HFR. “Risk-off trades dominated 2011, creating challenges for convergence oriented funds, while contributing to gains across fixed income and certain low net exposure hedged strategies. After a challenging 3Q, hedge funds adapted strategies to this continuing macro-volatility dynamic in 4Q in anticipation of this environment persisting into early 2012.”
Relative Value Arbitrage strategies post gains while Equity Hedge, Emerging Markets trail
Hedge funds concluded a challenging 2011 with a decline in December, as the HFRI Fund Weighted Composite Index declined by -0.18 percent, bringing full year 2011 performance to -4.8 percent, according to data released today by HFR (Hedge Fund Research, Inc.), the leading provider of data, indices and analysis of the global hedge fund industry. The decline for 2011 marks only the third calendar year decline since HFR’s index performance inception in 1990, but is the second decline in the last four years. Hedge funds produced a gain of +1.3 percent in 4Q11, following a sharp decline of -6.7 percent in the volatile 3Q; hedge funds gained +0.77 percent in 1H11.
Two of the four strategy areas ended 2011 with gains in December, including Macro (+0.16 percent) and Relative Value Arbitrage (+0.50 percent) strategies; Fixed Income-based Relative Value was the only strategy area of positive performance for full-year 2011, gaining +0.55 percent, while Macro declined by -3.6 percent. Event Driven posted a narrow decline of -0.01 percent in December and -2.65 percent for 2011.
Equity Hedge strategies were the weakest area of performance for both December and 2011, posting a decline of -0.66 percent in December, and concluding 2011 with a decline of -8.0 percent. Performance of Equity Hedge was undermined by weakness in Energy/Basic Materials, Emerging Markets and Fundamental Growth, which posted full-year declines of -16.75, -12.9 and -12.6 percent, respectively. Partially offsetting these declines, certain Equity Hedge sub-Hed ge Fund Research strategies posted 2011 gains, including Technology/Healthcare (+1.14 percent) and Short Bias (+1.0).
“Volatile and unpredictable market dynamics throughout the year created a challenging environment for hedge funds in 2011, with aggregate losses across currency, commodity, Emerging Markets and equity strategies related to the European currency and sovereign debt crisis,” stated Kenneth J. Heinz, President of HFR. “Risk-off trades dominated 2011, creating challenges for convergence oriented funds, while contributing to gains across fixed income and certain low net exposure hedged strategies. After a challenging 3Q, hedge funds adapted strategies to this continuing macro-volatility dynamic in 4Q in anticipation of this environment persisting into early 2012.”
Monday, January 9, 2012
Hedge Funds Take in $3.6 Billion in November, Reversing Surge of Redemptions in Previous Months
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Hedge Fund Managers More Optimistic on S&P 500. While Divided on Likelihood of QE3, Most Managers Think Employment Will Improve in 2012, According to BarclayHedge/TrimTabs Survey
BarclayHedge and TrimTabs Investment Research reported today that hedge funds took in an estimated $3.6 billion in November, a welcome reversal after redemptions surged to $9 billion in October and hit $2.59 billion in September. Industry assets increased to $1.71 trillion in November from $1.67 trillion in October, the first increase after five months of declines. The BarclayHedge Fund Index dipped 0.8% in November after increasing 3.5% in October. That reversal followed five consecutive monthly declines. Despite the increase, hedge fund industry assets stand close to their lowest level since January 2010.
“After months of outflows across nearly every hedge fund category, November saw outflows in only two investment styles: Emerging Markets, which shed $1.3 billion, and Equity Long-Short, which shed $1.0 billion,” says Sol Waksman, founder and President of BarclayHedge.
“November’s numbers are significantly better than October’s, when only five out of the 14 strategies we track showed any inflow and the rest were in the red,” said Leon Mirochnik, analyst at TrimTabs. Heaviest inflows for November were Multi-Strategy at $1.5 billion (5.75% of assets) and Macro at $981 million (8.5% of assets).
Meanwhile, The latest TrimTabs/BarclayHedge Survey of Hedge Fund Managers reveals growing numbers of fund managers are becoming more bullish and less bearish on U.S. equities. Bullish sentiment on the S&P 500 stands at 42% in December, the second-highest reading this year. Bearish sentiment dropped to 30%, the lowest reading since July 2011, from 36% in November. Managers were markedly bullish in only three months of 2011: January, July, and December.
The survey of 101 hedge fund managers also reveals that the managers are divided on whether the Fed will begin another round of quantitative easing in 2012. Most believe unemployment will be below 8.5% by the end of the year, and they expect value investing to be more profitable than growth investing. While a third expect gold to be the best-performing commodity of 2012, more than half expect oil or natural gas to come out on top.
Hedge Fund Managers More Optimistic on S&P 500. While Divided on Likelihood of QE3, Most Managers Think Employment Will Improve in 2012, According to BarclayHedge/TrimTabs Survey
BarclayHedge and TrimTabs Investment Research reported today that hedge funds took in an estimated $3.6 billion in November, a welcome reversal after redemptions surged to $9 billion in October and hit $2.59 billion in September. Industry assets increased to $1.71 trillion in November from $1.67 trillion in October, the first increase after five months of declines. The BarclayHedge Fund Index dipped 0.8% in November after increasing 3.5% in October. That reversal followed five consecutive monthly declines. Despite the increase, hedge fund industry assets stand close to their lowest level since January 2010.
“After months of outflows across nearly every hedge fund category, November saw outflows in only two investment styles: Emerging Markets, which shed $1.3 billion, and Equity Long-Short, which shed $1.0 billion,” says Sol Waksman, founder and President of BarclayHedge.
“November’s numbers are significantly better than October’s, when only five out of the 14 strategies we track showed any inflow and the rest were in the red,” said Leon Mirochnik, analyst at TrimTabs. Heaviest inflows for November were Multi-Strategy at $1.5 billion (5.75% of assets) and Macro at $981 million (8.5% of assets).
Meanwhile, The latest TrimTabs/BarclayHedge Survey of Hedge Fund Managers reveals growing numbers of fund managers are becoming more bullish and less bearish on U.S. equities. Bullish sentiment on the S&P 500 stands at 42% in December, the second-highest reading this year. Bearish sentiment dropped to 30%, the lowest reading since July 2011, from 36% in November. Managers were markedly bullish in only three months of 2011: January, July, and December.
The survey of 101 hedge fund managers also reveals that the managers are divided on whether the Fed will begin another round of quantitative easing in 2012. Most believe unemployment will be below 8.5% by the end of the year, and they expect value investing to be more profitable than growth investing. While a third expect gold to be the best-performing commodity of 2012, more than half expect oil or natural gas to come out on top.
Hedge Funds Experience Worst Year Since 2008; Underperform Equity Markets in 2011
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HEDGE FUNDS DECLINE -0.60% IN DECEMBER
Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -0.60% in December (-4.27% YTD), while the S&P 500 advanced +0.85% (-0.02% YTD), the Dow Jones Industrial Average advanced +1.43% (+5.52% YTD), and the NASDAQ Composite Index fell -0.58% (-1.81% YTD). The Barclays Aggregate Bond Index gained +1.10% (+7.86% YTD), the S&P/BG Cantor 7-10 Year Treasury Bond Index climbed +1.84% (+15.60%), and the Barclays High Yield Index gained +2.66% (+4.98% YTD).
“It was a disappointing year for hedge funds as they underperformed broad market returns for the second year in a row,” commented Charles Gradante, Co-Founder of Hennessee Group. “Hedge fund managers describe 2011 as ‘more frustrating than 2008’. High levels of uncertainty and the highest daily average volatility in 50 years resulted in managers getting ‘whipsawed’. While risk management dictated reduced exposures going into the fourth quarter, it precluded them from participating in a strong beta rally. In addition, alpha generation was extremely challenging throughout the year due to a macro-driven, high correlation environment.”
“Despite the performance struggles, we are optimistic on the outlook for the hedge fund industry. Hedge funds continue to attract capital due to their historical performance and ability to lower volatility and preserve capital. In addition, most investors understand the challenges for fundamentally-based managers in a macro driven market, and are confident they will not persist,” commented Lee Hennessee, Managing Principal of Hennessee Group. "While we are seeing some funds liquidate due to poor performance, we are seeing many quality managers closing the door to new capital as they reach capacity limits."
The Hennessee Long/Short Equity Index declined -0.77% in December and was down –3.55% for 2011. For the year, top performing funds were concentrated in better performing sectors, such as utilities, consumer staples and healthcare as well as long fixed income. 2011 was a mixed year for traditional benchmarks with the S&P closing the year flat, the Dow up (+5.52%) and the Russell 2000 down (-5.45%). Although the S&P 500 was flat, sectors showed a wide variance, with utilities performing the best, up +14.83%. Financials and materials were the worst performers, down -18.41% and -11.64%, respectively. Throughout the year, equity markets were driven by macro issues, which overshadowed strong corporate earnings and an improving economy. Several hedge funds experienced frustration in long positions where companies delivered and exceeded expectations but still declined more than the broad indices. Shorting was profitable for managers, though most report that they should have had more invested on the short side. One of the key drivers of underperformance was lack of beta participation during the strong October rally. Managers entered the fourth quarter with low exposure levels in an effort to protect capital and were caught off guard by the double digit rally in equity markets. Looking forward, managers state that equities look cheap relative to expected earnings and interest rates, but they remain concerned about slowing global economic growth and European sovereign debt issues, which should keep multiples low. However, if the European sovereign debt crisis can be contained, and there is some improvement in the housing and employment in the U.S., it would be very bullish for equities in 2012.
“Despite the fact that U.S. companies posted record profits, the market was flat in 2011. Fundamentals did not matter to investors. Rather, they were focused on the flurry of macro headlines from Europe, Asia, the Mideast and the U.S. Investors fluctuated wildly between ‘risk on’ and ‘risk off’ after the geopolitical strife in the Middle East, Japan's earthquake and tsunami, the debt crisis in Europe, and legislative gridlock in the U.S.” commented Charles Gradante. “That said, we at Hennessee Group are positive for 2012. Equity markets are priced as cheaply as they have been in decades. Corporate earnings should remain strong, and the U.S. economic recovery is picking up steam. Volatility will continue, but we think the positive fundamentals will have more relevance in 2012 than 2011.”
The Hennessee Arbitrage/Event Driven Index advanced slightly in December, declining -0.08%. For the full year, the Hennessee Arbitrage/Event Driven Index was down -2.17%, making it the best performing sub-strategy. Fixed income performed well throughout the year. In December, the Barclays Aggregate Bond Index gained +1.10% (+7.86% YTD). Treasuries were positive, as the S&P/BG Cantor 7-10 Year Treasury Bond Index advanced +1.84% (+15.60%). High yield was also positive as the Barclays High Yield Credit Bond Index advanced +2.66% (+4.98% YTD). High yield credit spreads tightened from 779 basis points to 723 basis points in December. Managers report that supply demand dynamics for credit remain strong, and they are finding attractive investment opportunities in high yield and leveraged loans. The Hennessee Distressed Index advanced +0.81% in December (-2.36% YTD). 2011 was a challenging year for distressed investing. Many managers were biased towards post reorganization equities, which remained unloved by the market. In addition, the European sovereign debt crisis shook confidence, delayed catalysts and pressured valuations. That said, managers feel conditions are improving and positions should realize value. In addition, managers are looking towards a wave of loan refinancing in 2013/14 as a significant source of opportunity. The Hennessee Merger Arbitrage Index decreased -0.08% in December (+0.18% YTD). Merger arbitrage funds ended the year slightly positive. While there were several attractive deals, high volatility and low interest rates detracted from performance. Despite a strong start, 2011 total mergers-and-acquisitions volume ($2.60 trillion) was less than in 2010 ($2.66 trillion). Europe's sovereign-debt crisis shattered the confidence of company executives to do deals despite cash rich balance sheets and low interest rates. Managers are somewhat optimistic that high cash levels and low multiples will drive merger and acquisition opportunities in 2012, especially if the Euro crisis subsides. The Hennessee Convertible Arbitrage Index advanced +0.25% in December (-1.02% YTD). On a regional basis, convertibles declined in the US and Asia, but sold off the most in Europe due to the ongoing sovereign debt concerns. Leverage is low among convertible arbitrage managers. Managers have dry powder available for when opportunities arise.
“It is still a bit early, but there are going to be some good investment opportunities in Europe. Convertible arbitrage managers are looking into the announced recapitalization of European financial institutions to meet new regulatory requirements. This will likely create attractive short-term investment opportunities as banks call securities to restructure balance sheets,” commented Charles Gradante. “It is still early due to the European sovereign debt crisis, but we could see some interesting investment opportunities coming out of Europe.”
The Hennessee Global/Macro Index declined -0.64% in December (-8.04% YTD), driven by losses in international and emerging markets. International markets underperformed domestic markets for the month and year, as the MSCI EAFE was down -1.03% for December and down -14.82% for the year. Throughout the year, international markets were battered by macro headwinds and unexpected developments, such as the Japanese Tsunami, Middle East rebellion, European sovereign debt crisis and U.S. debt downgrade. International hedge fund managers outperformed, but were still down as the Hennessee International Index fell -0.76% in December and -6.39% year to date. Many managers were positioned for a decoupling of emerging markets from developed markets and upside from continued strong growth. However, throughout the year, investors grew concerned about slowing growth and recession in the emerging markets, and markets plunged. The MSCI Emerging Markets Index lost -1.29% for the month, leaving it down -20.41% for the year. The Hennessee Emerging Markets Index was down -0.55% in December and down -12.85% for the year as hedge funds benefited from reduced exposures and hedges. The Hennessee Macro Index was down -0.48% in December (-2.14% YTD). Performance of macro funds was varied. The best performing funds were positioned conservatively, long Treasuries, TIPS, and gold. Interest rates continued to decrease in December, as debt and policy issues in the U.S. and Europe played the central role. The 10-year Treasury dropped 21 basis points during the month to close at 1.88%. The 30-year Treasury decreased to 2.90%, down from 4.34% at the end of 2010. Gold ended the year at $1,568 down from $1,751 in November due to profit taking, but still up +10% for the year. The U.S. Dollar Index advanced +2.31% in December, pushing it in to positive territory for the year, up +1.46%. The commodities run ended abruptly in 2011. The S&P GSCI declined -2.11% in December and was down -1.18% for the year.
HEDGE FUNDS DECLINE -0.60% IN DECEMBER
Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -0.60% in December (-4.27% YTD), while the S&P 500 advanced +0.85% (-0.02% YTD), the Dow Jones Industrial Average advanced +1.43% (+5.52% YTD), and the NASDAQ Composite Index fell -0.58% (-1.81% YTD). The Barclays Aggregate Bond Index gained +1.10% (+7.86% YTD), the S&P/BG Cantor 7-10 Year Treasury Bond Index climbed +1.84% (+15.60%), and the Barclays High Yield Index gained +2.66% (+4.98% YTD).
“It was a disappointing year for hedge funds as they underperformed broad market returns for the second year in a row,” commented Charles Gradante, Co-Founder of Hennessee Group. “Hedge fund managers describe 2011 as ‘more frustrating than 2008’. High levels of uncertainty and the highest daily average volatility in 50 years resulted in managers getting ‘whipsawed’. While risk management dictated reduced exposures going into the fourth quarter, it precluded them from participating in a strong beta rally. In addition, alpha generation was extremely challenging throughout the year due to a macro-driven, high correlation environment.”
“Despite the performance struggles, we are optimistic on the outlook for the hedge fund industry. Hedge funds continue to attract capital due to their historical performance and ability to lower volatility and preserve capital. In addition, most investors understand the challenges for fundamentally-based managers in a macro driven market, and are confident they will not persist,” commented Lee Hennessee, Managing Principal of Hennessee Group. "While we are seeing some funds liquidate due to poor performance, we are seeing many quality managers closing the door to new capital as they reach capacity limits."
The Hennessee Long/Short Equity Index declined -0.77% in December and was down –3.55% for 2011. For the year, top performing funds were concentrated in better performing sectors, such as utilities, consumer staples and healthcare as well as long fixed income. 2011 was a mixed year for traditional benchmarks with the S&P closing the year flat, the Dow up (+5.52%) and the Russell 2000 down (-5.45%). Although the S&P 500 was flat, sectors showed a wide variance, with utilities performing the best, up +14.83%. Financials and materials were the worst performers, down -18.41% and -11.64%, respectively. Throughout the year, equity markets were driven by macro issues, which overshadowed strong corporate earnings and an improving economy. Several hedge funds experienced frustration in long positions where companies delivered and exceeded expectations but still declined more than the broad indices. Shorting was profitable for managers, though most report that they should have had more invested on the short side. One of the key drivers of underperformance was lack of beta participation during the strong October rally. Managers entered the fourth quarter with low exposure levels in an effort to protect capital and were caught off guard by the double digit rally in equity markets. Looking forward, managers state that equities look cheap relative to expected earnings and interest rates, but they remain concerned about slowing global economic growth and European sovereign debt issues, which should keep multiples low. However, if the European sovereign debt crisis can be contained, and there is some improvement in the housing and employment in the U.S., it would be very bullish for equities in 2012.
“Despite the fact that U.S. companies posted record profits, the market was flat in 2011. Fundamentals did not matter to investors. Rather, they were focused on the flurry of macro headlines from Europe, Asia, the Mideast and the U.S. Investors fluctuated wildly between ‘risk on’ and ‘risk off’ after the geopolitical strife in the Middle East, Japan's earthquake and tsunami, the debt crisis in Europe, and legislative gridlock in the U.S.” commented Charles Gradante. “That said, we at Hennessee Group are positive for 2012. Equity markets are priced as cheaply as they have been in decades. Corporate earnings should remain strong, and the U.S. economic recovery is picking up steam. Volatility will continue, but we think the positive fundamentals will have more relevance in 2012 than 2011.”
The Hennessee Arbitrage/Event Driven Index advanced slightly in December, declining -0.08%. For the full year, the Hennessee Arbitrage/Event Driven Index was down -2.17%, making it the best performing sub-strategy. Fixed income performed well throughout the year. In December, the Barclays Aggregate Bond Index gained +1.10% (+7.86% YTD). Treasuries were positive, as the S&P/BG Cantor 7-10 Year Treasury Bond Index advanced +1.84% (+15.60%). High yield was also positive as the Barclays High Yield Credit Bond Index advanced +2.66% (+4.98% YTD). High yield credit spreads tightened from 779 basis points to 723 basis points in December. Managers report that supply demand dynamics for credit remain strong, and they are finding attractive investment opportunities in high yield and leveraged loans. The Hennessee Distressed Index advanced +0.81% in December (-2.36% YTD). 2011 was a challenging year for distressed investing. Many managers were biased towards post reorganization equities, which remained unloved by the market. In addition, the European sovereign debt crisis shook confidence, delayed catalysts and pressured valuations. That said, managers feel conditions are improving and positions should realize value. In addition, managers are looking towards a wave of loan refinancing in 2013/14 as a significant source of opportunity. The Hennessee Merger Arbitrage Index decreased -0.08% in December (+0.18% YTD). Merger arbitrage funds ended the year slightly positive. While there were several attractive deals, high volatility and low interest rates detracted from performance. Despite a strong start, 2011 total mergers-and-acquisitions volume ($2.60 trillion) was less than in 2010 ($2.66 trillion). Europe's sovereign-debt crisis shattered the confidence of company executives to do deals despite cash rich balance sheets and low interest rates. Managers are somewhat optimistic that high cash levels and low multiples will drive merger and acquisition opportunities in 2012, especially if the Euro crisis subsides. The Hennessee Convertible Arbitrage Index advanced +0.25% in December (-1.02% YTD). On a regional basis, convertibles declined in the US and Asia, but sold off the most in Europe due to the ongoing sovereign debt concerns. Leverage is low among convertible arbitrage managers. Managers have dry powder available for when opportunities arise.
“It is still a bit early, but there are going to be some good investment opportunities in Europe. Convertible arbitrage managers are looking into the announced recapitalization of European financial institutions to meet new regulatory requirements. This will likely create attractive short-term investment opportunities as banks call securities to restructure balance sheets,” commented Charles Gradante. “It is still early due to the European sovereign debt crisis, but we could see some interesting investment opportunities coming out of Europe.”
The Hennessee Global/Macro Index declined -0.64% in December (-8.04% YTD), driven by losses in international and emerging markets. International markets underperformed domestic markets for the month and year, as the MSCI EAFE was down -1.03% for December and down -14.82% for the year. Throughout the year, international markets were battered by macro headwinds and unexpected developments, such as the Japanese Tsunami, Middle East rebellion, European sovereign debt crisis and U.S. debt downgrade. International hedge fund managers outperformed, but were still down as the Hennessee International Index fell -0.76% in December and -6.39% year to date. Many managers were positioned for a decoupling of emerging markets from developed markets and upside from continued strong growth. However, throughout the year, investors grew concerned about slowing growth and recession in the emerging markets, and markets plunged. The MSCI Emerging Markets Index lost -1.29% for the month, leaving it down -20.41% for the year. The Hennessee Emerging Markets Index was down -0.55% in December and down -12.85% for the year as hedge funds benefited from reduced exposures and hedges. The Hennessee Macro Index was down -0.48% in December (-2.14% YTD). Performance of macro funds was varied. The best performing funds were positioned conservatively, long Treasuries, TIPS, and gold. Interest rates continued to decrease in December, as debt and policy issues in the U.S. and Europe played the central role. The 10-year Treasury dropped 21 basis points during the month to close at 1.88%. The 30-year Treasury decreased to 2.90%, down from 4.34% at the end of 2010. Gold ended the year at $1,568 down from $1,751 in November due to profit taking, but still up +10% for the year. The U.S. Dollar Index advanced +2.31% in December, pushing it in to positive territory for the year, up +1.46%. The commodities run ended abruptly in 2011. The S&P GSCI declined -2.11% in December and was down -1.18% for the year.
Wednesday, January 4, 2012
HFN Strategy Focus Report: Convertible Arbitrage
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Convertible arbitrage strategies were -0.53% in November, but have performed well relative to the aggregate hedge fund industry in 2011. Despite above industry average performance in 2009, 2010 and 2011, the group has seen mixed interest from investors resulting in cumulative net redemptions in 2011. Net redemptions for 2011 are the result of outflows in the first half of the year as fund flows have been positive in the second half even while broad hedge fund industry asset flows have been negative; a very positive sign for the strategy.
Complete report
Convertible arbitrage strategies were -0.53% in November, but have performed well relative to the aggregate hedge fund industry in 2011. Despite above industry average performance in 2009, 2010 and 2011, the group has seen mixed interest from investors resulting in cumulative net redemptions in 2011. Net redemptions for 2011 are the result of outflows in the first half of the year as fund flows have been positive in the second half even while broad hedge fund industry asset flows have been negative; a very positive sign for the strategy.
Complete report
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