July 22, 2008 / 1:31 PM / 11 years ago

Funds of hedge funds look to global macro for gains

LONDON (Reuters) - Funds of hedge fund managers are looking to global macro funds to try and steer clear of the mess thrown up by the credit crisis while cautiously dipping their toes in a small pool of more risky assets, a Reuters poll found.

Funds of hedge fund managers are looking to global macro funds to try and steer clear of the mess thrown up by the credit crisis while cautiously dipping their toes in a small pool of more risky assets, a Reuters poll found. REUTERS/Toru Hanai (JAPAN)

Stormy markets have torn through the hedge fund market this year, forcing many to shut up shop and others to tumble, but most have still managed to keep well ahead of the severe double digit losses suffered by global stock markets in the first half of the year.

The quarterly survey of 13 managers which invest in a basket of hedge funds and manage a total of around $150 billion in assets showed global macro funds leading the way through 2008 as they tend to benefit from periods of high volatility.

Typically such funds bet on the direction of markets, currencies or debt, and commodities.

“We have all been complaining for three plus years about the lack of risk premia everywhere and the lack of volatility. Well, be careful for what you wish for,” said Mike Hennessy, managing director of investment at Morgan Creek Capital Management in North Carolina.

Just two strategies, global macro and multi-strategy arbitrage, were forecast to provide above average returns in the second half of 2008, roughly in line with the April poll, but down on the five strategies predicted to excel back in January.

Indeed, turbulent markets have proved a double-edged sword for hedge funds this year. Hedge Fund Research reported that 170 funds liquidated in the first three months of the year, up from 138 funds that closed in the same period last year.

But losses have not been as bad as many perceive. HFR’s fund of funds composite index fell 2.54 percent to the end of June, some way off the 13.8 percent the MSCI World Index fell in that period.

Managers in the survey said investment diversification, being short financials — betting they will fall further — and any allocations to energy-related sectors had helped portfolios this year. They have also held high levels of cash.

Oil prices rose from around $115 a barrel at the time of April’s survey to rally over $147 in July. They have since fallen back sharply to around $130 a barrel.

The credit crisis has been a bruising experience for hedge funds, and for many banks — shares of Swiss financial heavyweight UBS have plummeted 53 percent so far this year. But the crunch has also offered up investment ideas.

“The greatest financial crisis in our lifetime has created excellent opportunities for the next one to five years,” said Hennessy, highlighting senior bank loans, certain structured debt and distressed debt as areas to consider.

EMERGING SINKING

Indeed, the survey showed that managers increased their allocations to distressed debt slightly over the last quarter.

Such strategies offer increasing investment opportunities as corporate defaults rise.

In contrast, managers are growing more wary of emerging markets strategies to which they have reduced their allocations and forecast no relief in the coming two quarters.

This was only the second survey since the poll started in 2004 where emerging markets were estimated to post below average returns.

“We are in a time where we need to protect capital than take big risks. If we invest now it would be like catching a falling knife,” said Christophe Chrun, fund manager at Dexia Asset Management in Paris.

That would appear a wise move as the HFR Emerging Markets Index fell close to 7.0 percent in the first six months of the year, making it one of the worst performing hedge fund strategies, but still above the MSCI Emerging Markets index which lost around 13 percent in that time.

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