The possibility that hedge funds are making a comeback has been explored in the media recently, suggesting that investors are once again hungry for the huge returns these funds offered a decade ago, as their companies return to profitability. Recent S&P 500 index results suggest that US equities are second only to their Japanese counterparts.
One of the reasons behind this re-emergence is the perceived recovery of the US economy. American markets are performing much better than markets in Europe. Though there is a case to be made for Asian equities, amongst developed markets, the US seems to be back as leader of the pack.
Analysts are already suggesting a bull run on the US equities market, driven in part by the robust recovery of economic output. “For hedge funds the biggest story this year, from a performance standpoint has been the US stock market,” says Adam Sarhan, CEO and founder of Sophic Associates, a US-based global macro hedge fund. “These hedge funds had been under performing in recent years because global asset classes and the capital market has been a mixed bag. The strongest asset class in the world this year has been the US stock market, hands down. Investors that long US stocks have done very well for the most part. Other markets have not done that well, gold is down, silver is down, oil was down now it’s up; but they have offered nowhere near the returns of the stock market.”
John Paulson’s Recovery Fund, which was much derided after his catastrophic call on gold, is up 35 per cent this year. Paulson has long been seen as a trendsetter among the hedge fund set, and his recent success is likely to inspire many to follow his lead into equities once again.
Though Paulson’s is by no means the only hedge fund to be turning a profit this year. Lansdowne Partners, a huge player in equity hedge funds, have also seen their gains increase dramatically. They have reported that investments in US-based blue-chip businesses have made between 22 and 85 per cent this year.
Hedge funds posted gains across Equity Hedge, Event Driven & Relative Value Arbitrage strategies in July, as most strategies reversed losses from the prior month on strong earnings, acceleration of M&A activity, moderating concerns of a sharp rise in interest rates and receding macro risks.
The HFRI Fund Weighted Composite gained +1.4 per cent for the month, the highest monthly performance since January, according to data released today by HFR, the established leader in the indexation, analysis, and research of the global hedge fund industry.
The HFRI Equity Hedge Index led strategy performance in July with a gain of +2.5 per cent; Equity Hedge gains were broad based across sub-strategies, sparked by strong earnings reports by Starbucks, Facebook and US Financials and led by HFRI Technology/Healthcare, Energy/Basic Materials and Fundamental Value strategies. The HFRI Equity Hedge: Technology/Healthcare Index gained +4.0 per cent in July, the best monthly performance since September 2010, while the HFRI EH: Energy/Basic Materials posted a gain of +3.7 per cent, the best monthly performance for energy focused funds in 18 months. Fundamental Value strategies added +3.3 per cent in July, with contributions from US, European and Asian exposures, as well as from US Consumer, Financial and Energy sectors. With the July performance, Equity Hedge surpassed YTD performance of Event Driven, leading all main strategy indices with a +7.7 per cent gain.
Event Driven strategies also gained in July, with the HFRI Event Driven Index up +1.5 per cent, reversing the -1.1 per cent decline of the prior month. Event Driven performance was led by Activist and Special Situations exposures, with these adding +3.8 and +1.8 per cent, respectively, in the month. Positioning across Sony, Dell, Apple, Yahoo and Herbalife, as well as M&A positions in Elan, Air Products and Publicis/Omnicom all contributed to performance gains. HFRI Distressed Index gained +1.4 per cent while the HFRI Merger Arbitrage Index advanced +1.0 per cent. Fixed Income-based Relative Value strategies were also positive in July, as high yield credit tightened and concerns about sharp rise in interest rates associated with a near term extraction of stimulus measures by the US Federal Reserve subsided. The HFRI Relative Value Index gained +0.4 per cent for the month, led by Volatility and Asset Backed strategies, which increased by +1.2 and +0.8 per cent, respectively.
Macro hedge funds posted their third consecutive monthly decline, with the HFRI Macro Index down -0.1 per cent. The HFRI Macro: Systematic Diversified/CTA Index declined -1.1 per cent for the month, with weakness from sharp reversals in Commodity and Currency strategies. Discretionary Macro exposure in Energy & Commodity, as well as Active Trading strategies, had positive contributions, partially offsetting CTA losses.
The HFRI Fund of Hedge Funds Index also posted a gain of +1.3 per cent. Despite recent capital outflows, the FOF Index has posted a YTD performance of +4.78 per cent, in line with the YTD gain of +4.73 per cent of the Fund Weighted Composite Index.
Asian stocks fell to their lowest in a month on Wednesday following a second day of losses on Wall Street, led by a steep decline in the Nikkei as a firmer yen took a toll on Japanese exporters.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.7 per cent to its lowest since July 11, and Tokyo’s Nikkei slid to a one-week trough as the dollar slumped to a six-week low against the yen.
Exporters such as Toyota lost ground on concerns the stronger yen would erode their dollar earnings when repatriated. The Nikkei skidded as much as 2.6 per cent to 14,020 in morning deals, before paring its fall to under 2 per cent.
The soggy performance on Asian bourses came after the US S&P 500 index fell 0.6 per cent, partly on uncertainty about when the Federal Reserve will begin to scale back its stimulus.
Investors keen for clarity on the timing of the Fed’s plan were left sorely disappointed after comments from two top Federal Reserve officials shed no new light.
This uncertainty coupled with thin trading conditions and a lack of fresh impetus conspired to keep the greenback pinned down against a basket of major currencies.
The dollar index held near a one-week low as the greenback slid to 97.09 yen, a level last seen on June 25. The euro, while a touch softer on the day at USD1.3296, remained near a one-week high around USD1.3323.
On Thursday, the Bank of Japan will announce the outcome of its two-day policy review, and is widely expected to press on with its massive asset-buying programme.
Hedge funds-of-funds providers say they are getting a fresh look from institutional investors in Asia this year, after a prolonged drought.
On July 17, Korea Post Insurance, which manages USD27 billionin premiums for insurance policies sold through the country’s post office network, issued an RFP for global hedge funds-of-funds managers with multistrategy offerings.
The latest global data from Hedge Fund Research Inc., a Chicago-based industry tracker, show that trend persisting, with an estimated net outflow of USD9.6 billion from hedge funds-of-funds strategies in the first half of 2013, even as the underlying hedge fund industry enjoyed net inflows of USD30 billion.
In Asia, though, some hedge funds-of-funds managers say they’re finding reasons to accentuate the positive.