| LONDON, March 27
LONDON, March 27 Hedge funds are cashing in some
of their chips after enjoying a bumper first quarter, wary that
a sudden change in market sentiment could see them take the sort
of losses suffered in last year's volatile markets.
Hedge funds returned 5 percent in the first two months of
the year, the best start to a calendar year since 2000 according
to Hedge Fund Research, as the European Central Bank's 1
trillion euro ($1.3 trillion) ca s h injection boosted assets
across the board.
Some star names recorded huge gains. Crispin Odey's Odey
European fund gained 21.1 percent and Johnny de la Hey's Tosca
fund rose 13.7 percent to mid-March, while Michael Hintze's $1.4
billion CQS Directional Opportunities fund was up 13.9 percent
Many managers remain positive on markets, but in a number of
cases have opted to trim their bets, influenced by sharp
volatility last year during the euro zone debt crisis that saw
the average fund lose 5.3 percent and some more bullish funds
take much bigger losses.
"Over the last week or so we've actually seen (risk) come
off a bit," said Paul Harvey, European head of sales in prime
finance at Citi.
"We all want this rally to continue but we are all
relatively cautious about the broader macroeconomic environment
and the political environment, and uncertainty certainly
Many managers came into this year with low levels of risk,
missing out on the start of the rally after underestimating the
impact on markets of the ECB's so-called Long Term Refinancing
Operations, designed to avoid another credit crunch.
As markets continued to rebound during the first quarter,
however, a number of funds hiked their bets, in particular
favouring the commodities and financials sectors, according to
one fund of funds manager.
According to Citi's Harvey, equity long-short funds upped
net exposure - the difference between bets on rising stocks and
falling stocks - to 73 percent, and gross exposure - the sum of
long and short bets - to 165 percent this quarter.
However, in some cases this has now come down. "We've seen
some reductions but (I) wouldn't say (a) huge swing to risk
off," said one prime broker who spoke on condition of anonymity.
CQS's Australian founder Hintze is among those to have
struck a more cautious tone recently.
In his February investor report he wrote: "We remain broadly
constructive on markets but are mindful of potential volatility
that could arise due to the ongoing macro uncertainty."
Managers are worried the euro zone debt crisis could flare
up again, that China's economic growth is slowing, and that
tensions between Iran and the West could lead to further gains
in the oil price that could reignite inflation.
David Stewart, chief executive of Odey Asset Management,
told Reuters the firm remained bullish on equities, preferring
them to credit.
But he added: "When the market has had a good run then you
often trim a bit. We haven't changed our view. We know it's
going to be difficult ... Equities are the right place to be ...
The LTRO has been pretty favourable to equities."
Some funds are also beginning to look at put options as a
way of protecting their portfolios from market falls, encouraged
by the cheaper pricing of options thanks to a fall in volatility
since the autumn. The VIX, a gauge of volatility, is down
by two-thirds since early October, for instance.
"Some people who haven't used it historically (are looking
at using options)," said Morten Spenner, chief executive of fund
of funds firm International Asset Management. "As the pricing
has come down because of the VIX, it's become more attractive
for people to look at it.
"People are careful having made gains," he added. "Everyone
will now agree that the situation does look more positive, but
there are still quite a few things to solve."
($1 = 0.7540 euros)
(Additional reporting by Tommy Wilkes; Editing by Mark Potter)