22 Feb 2010
The current market conditions continue to provide attractive opportunities for investment in hedge funds but following good practice when selecting managers remains crucial, according to Mercer. In 2009, hedge funds delivered their best return in a decade, though some managers have come through the financial turmoil stronger than others.
Mr Fox also observed the following trends in the hedge fund market:
- The dispersion of returns within the equity markets has created great opportunities for long/short equity managers.
- Attractive opportunities are likely to come out of the merger arbitrage sector, with companies looking to acquisitions to generate growth.
- On thedistressed side, while the compression in credit spreads has reduced some of the beta opportunities, there are good security-specific opportunities for 2010.
- Relative value managers were strong in 2009, but opportunities do remain for this style of manager.
- Trading strategies continue to warrant a place in most portfolios because of the diversification benefits that they provide. However investors need to understand the variety of managers that they can choose from - because not all will do well if the markets continue to be sentiment-driven and choppy.
- We anticipate more use of active commodity managers as they provide an attractive alpha source that should be lowly correlated to other mandates.
Simon Fox, a Senior Hedge Funds Researcher at Mercer, commented: “Although returns from hedge funds are not expected to be as strong as in 2009, we believe the current market conditions still provide great opportunities for active management. Hedge funds provide investors with a way of accessing opportunities that they otherwise couldn’t capture.
“The flexible approach offered by hedge funds should pay dividends this year, especially now that they face less competition from within the hedge fund industry and from investment banks.”
Mr Fox also observed the following trends in the hedge fund market:
- The dispersion of returns within the equity markets has created great opportunities for long/short equity managers.
- Attractive opportunities are likely to come out of the merger arbitrage sector, with companies looking to acquisitions to generate growth.
- On thedistressed side, while the compression in credit spreads has reduced some of the beta opportunities, there are good security-specific opportunities for 2010.
- Relative value managers were strong in 2009, but opportunities do remain for this style of manager.
- Trading strategies continue to warrant a place in most portfolios because of the diversification benefits that they provide. However investors need to understand the variety of managers that they can choose from - because not all will do well if the markets continue to be sentiment-driven and choppy.
- We anticipate more use of active commodity managers as they provide an attractive alpha source that should be lowly correlated to other mandates.
Mr Fox added: “With many clients having captured the broad ‘beta’ opportunities in 2009, looking at hedge funds should be high on their agendas for 2010. We are currently working with a number of clients to identify the best opportunities and to select the most appropriate managers.”
