HEDGE funds are starting to shine again. They have so far successfully navigated the turbulence in the financial markets this year. According to Credit Suisse/Tremont Hedge Index’s analysis of more than 5,000 funds, they posted returns of 3.1 per cent in the first quarter, outperforming traditional equity and bond indices. This helped them move towards recouping the losses made during the financial crisis. As of the end of March funds had earned back more than 90 per cent of losses made in 2008. Those following event-driven strategies – profiting from things like M&As, bankruptcies and corporate restructuring – were the top performers, posting an average return of 4.8 per cent.
This is evidence that managers are finding opportunities to make profits in less traditional strategies, says David Butler, founding member of Kinetic Partners, a professional services firm that specialises in asset management: “I think event-driven, macro and distressed credit strategies will continue to do well this year.” At the same time, Butler says that traditional strategies such as long and short equity funds, emerging markets and commodities could struggle to replicate last year’s performance. Inflows to hedge funds also increased. Assets under management stood at $1.5 trillion at the end of the first quarter, and are expected to grow to $2 trillion by the end of the year.
Although investors are willing to part with their cash, they are demanding more from their managers for doing so. Credit Suisse/Tremont has found that 43 per cent of investors have received improved redemption terms from their fund managers, while 94 per cent of investors report that they are currently receiving more transparency from their managers regarding positions they are holding, compared to position information they received in the past.
This relatively recent development could be a blessing for the industry. Increased vigilance by investors can actually help improve performance, says Vernon Barback, president and chief operating officer of GlobeOp, the hedge fund administrator. “Investors want to make sure that they are really getting alpha from hedge fund managers. To some degree during the financial crisis investors felt that some funds weren’t actually giving them alpha but instead they were receiving leveraged beta.”
The hedge fund industry might have had a good start to the year, but investors are increasingly diligent in ensuring that they know what’s happening with their money. Hedge fund managers will have to work for their fees.