5 Dec 2011
FRM report that hedge fund performance was broadly negative in November. The overall range of performance across managers was, however, much narrower compared with recent months.
The industry as a whole has a long bias to risk assets, and so the strong sell-off at the start of the month triggered risk management policies and a widespread reduction of risk. The HFRX Global Hedge Fund Index posted a loss of 0.9% for the month.
Managers were generally bearishly positioned through the month, particularly with respect to European exposure. Some managers benefitted from tactical short positions which were reloaded at good prices in October.
The worst-performing strategy was equity long-short, in particular long-biased managers who were positioned against the prevailing market direction. The majority of managers, however, ended the month flat.
Overall, quantitative strategies produced the best returns. Despite the month-end reversal, longer-term systematic trading managers generated small gains for the month. In addition, technically-oriented statistical arbitrage managers made money as mean-reverting strategies worked well.
Hedge fund outlook
In general, hedge funds have been reticent to add to risk levels whilst the market environment remains vulnerable to idiosyncratic, policy-driven moves (both regulatory and political). FRM anticipates that managers will remain cautious going into the end of the year, particularly as the seasonal drop in volumes could lead to extended technical price moves. Significant reductions in net exposures and margin to equity ratios have already been implemented and managers are continuing to shift out of longer-duration, structural trades. Furthermore, most managers have kept their shorts in anticipation of continued volatility. A few of the trigger points that managers have cited as critical to any meaningful increase in risk exposures are a reduction in intra-day volatility (a sign of consistent momentum) and more clarity on the European situation.
Though managers are exercising additional prudence in navigating the current market conditions, FRM report that there are still pockets of opportunity. Amongst the managers that they favour, the opportunity set is focused on shorter duration trades and those that have hard catalysts. For example, in the Event space they predict that strategic deals will continue to happen as companies in low growth economies strive to expand operations through consolidation.
The reduced participation in liquidity provision from investment banks is arguably more extreme than it has ever been.
FRM believe that credit markets are becoming an increasingly challenging place to have exposure. The main concern being liquidity: mutual fund flows have been erratic, and furthermore, dealers are under pressure to reduce inventories as much as possible. Impending regulatory changes in European CDS trading is further reason to think that the environment will be difficult for fundamentally-oriented specialist credit managers.
Mortgages are another area in which investment bank trading activity has diminished considerably. Hedge fund managers are able to produce returns on low risk, liquid trades. For example, using agency derivatives managers have been exploiting the difference between specified pools of mortgages and pre-announced pools (TBAs) which have faster prepayment rates.
Overall, regarding portfolio positioning FRM feel that technical strategies are the right space to be in for now. In particular, they continue to have a bias for liquid and market neutral strategies.
The industry as a whole has a long bias to risk assets, and so the strong sell-off at the start of the month triggered risk management policies and a widespread reduction of risk. The HFRX Global Hedge Fund Index posted a loss of 0.9% for the month.
Managers were generally bearishly positioned through the month, particularly with respect to European exposure. Some managers benefitted from tactical short positions which were reloaded at good prices in October.
The worst-performing strategy was equity long-short, in particular long-biased managers who were positioned against the prevailing market direction. The majority of managers, however, ended the month flat.
Overall, quantitative strategies produced the best returns. Despite the month-end reversal, longer-term systematic trading managers generated small gains for the month. In addition, technically-oriented statistical arbitrage managers made money as mean-reverting strategies worked well.
Hedge fund outlook
In general, hedge funds have been reticent to add to risk levels whilst the market environment remains vulnerable to idiosyncratic, policy-driven moves (both regulatory and political). FRM anticipates that managers will remain cautious going into the end of the year, particularly as the seasonal drop in volumes could lead to extended technical price moves. Significant reductions in net exposures and margin to equity ratios have already been implemented and managers are continuing to shift out of longer-duration, structural trades. Furthermore, most managers have kept their shorts in anticipation of continued volatility. A few of the trigger points that managers have cited as critical to any meaningful increase in risk exposures are a reduction in intra-day volatility (a sign of consistent momentum) and more clarity on the European situation.
Though managers are exercising additional prudence in navigating the current market conditions, FRM report that there are still pockets of opportunity. Amongst the managers that they favour, the opportunity set is focused on shorter duration trades and those that have hard catalysts. For example, in the Event space they predict that strategic deals will continue to happen as companies in low growth economies strive to expand operations through consolidation.
The reduced participation in liquidity provision from investment banks is arguably more extreme than it has ever been.
FRM believe that credit markets are becoming an increasingly challenging place to have exposure. The main concern being liquidity: mutual fund flows have been erratic, and furthermore, dealers are under pressure to reduce inventories as much as possible. Impending regulatory changes in European CDS trading is further reason to think that the environment will be difficult for fundamentally-oriented specialist credit managers.
Mortgages are another area in which investment bank trading activity has diminished considerably. Hedge fund managers are able to produce returns on low risk, liquid trades. For example, using agency derivatives managers have been exploiting the difference between specified pools of mortgages and pre-announced pools (TBAs) which have faster prepayment rates.
Overall, regarding portfolio positioning FRM feel that technical strategies are the right space to be in for now. In particular, they continue to have a bias for liquid and market neutral strategies.
