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Not being dragged by a hedge backwards
Hedge funds have experienced eight years of fruitful returns, but the past 12 months have been a different story. So is the end drawing nigh for hedge fund investments or is there still more to come?
Undoubtedly market turmoil and regulatory changes make the environment substantially more difficult for hedge fund managers and, for that matter, for any investor. One thing the hedge fund industry has shown is an outstanding ability to innovate and for those managers that survive the crisis there are a multitude of investment opportunities. A mass of inefficiencies have been created as markets have been driven by fear and lack of liquidity rather than fundamentals.
Market participants have focused on the negative impact of the regulatory changes prohibiting short selling. Of course, this changes the playing field, and will likely reduce shorting of small-cap stocks as managers avoid the risk of a short squeeze. This is in no way a one way street and there will be advantages to those who successfully adapt. Finally a reduction in assets across the board from redemptions, closures and massive deleveraging should make these opportunities all the more profitable. You just have to stay in the game.
A sensible conclusion would be that allocations to hedge funds are still appropriate, although more than ever, you need to be highly selective and positioned in the correct strategies and funds with a heightened focus on liquidity and security.
Kate Brown is portfolio manager on the investment team for SG Hambros.
