Reuters / London Feb 19, 2012, 00:24 IST
Article from The Business Standard
Used to criticism for caring only about short-term profit, hedge funds are now being faulted for a failure to think short-term enough after losing out badly in last year's volatile markets.
A series of bad bets by hedge funds, which were not able to keep up with markets roiled by the euro zone debt crisis, pushed the industry down 5.2 per cent last year, according to Hedge Fund Research.
The second year of losses in a span of four years for an industry used to chasing rapid gains from takeovers and restructurings looked especially bad because the benchmark S&P 500 stock index was flat. Double-digit gains were the norm in the 1990s for firms that demand high fees for their vaunted acumen.
“Many hedge funds are too focused on the medium term and not enough on price action,” said hedge fund manager Philippe Gougenheim, the former head of hedge funds at Swiss fund firm Unigestion, who is now launching his own firm.
“For instance, some commodities funds that did not do well last year were too focused on the fundamentals, even when the short-term macro environment was not very good.”
Among those that fared the worst were long-short equity funds, which buy shares they expect to rise and sell short those expected to do bad. They lost 8.3 per cent last year. Market-neutral funds were down 2.1 per cent. Commodity funds tumbled 17.3 per cent.
“If you make a good fundamental call but the timing is wrong then it could potentially be a bad investment,” said Sal Naro, founder of Coherence Capital Partners. “Asset managers are not paid for making sound credit calls at the wrong time.”
Peter Rigg, global head of the alternative investments group at HSBC Alternative Investments, said "with the benefit of hindsight" some funds had not focused enough on short-term issues.
‘More pragmatic’ The criticism reflects in part the maturity of the $2-trillion industry, which in its early days was characterised by small, start-up funds, but which is now dominated by huge, multi-billion dollar funds.
These can be less nimble and can take longer to exit their positions, meaning their bets are often longer-term.
It also shows how some funds have changed their habits and shed their maverick image to accommodate the pension funds and other institutional investors, who now dominate the industry.
Funds were caught out last year putting on the so-called pairs trade, in which they match a bet on a rising stock with a bet on a falling stock, often in the same sector.
Such bets rely on low correlations between stocks and only require a manager’s view on the differing worth of the stocks to be borne out over a period of time, whichever direction the market moves. But correlations between stocks rose sharply last year, as they were all caught in the maelstrom and markets flipped between fears over Europe’s debts and optimism the problems could be contained. Investors bought and sold almost indiscriminately and pairs traders suffered.
“Fundamentals were no longer relevant in driving performance in (some) underlying asset classes,” said Aureliano Gentilini, managing partner at research firm Mathema, saying the same principle applied to commodities as to stocks. He said some hedge funds had shifted to a ‘more pragmatic’ approach to take account of the changing environment. But even that cannot guarantee success.
© Thomson Reuters 2012
Article from The Business Standard
