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Hedge fund investors stay the course despite worse month in history

David Stevenson, 26/06/2020

For an asset class that largely depends on underlying equities as a source of alpha, this year’s market ructions were going to be tough. However, information from alternative asset info provider Preqin shows the depths of the devastation to hedge funds, with March proving to be the worst month on record.

However, the firm added that ‘some progress’ has been made towards recovery with 30 percent of funds being positive year-to-date and 7 percent of managers up by 10 percent or more.

Redemptions are still being made from the oft under fire asset class although Preqin stated that this makes up for a small portion of total industry assets.

The firm took a poll of hedge fund investors and despite the dismal performance across most strategies, 54 percent said they were not planning to make any changes to their allocations to hedge funds. There was also quite an even split between those looking to add and reduce their hedge fund assets, with 18 percent having redeemed more than 20 percent of their portfolio while 14 percent increasing their exposure to the class by the same amount.

Remko van der Erf, co-head of alternative strategies at Netherlands-based Kempden Asset Management discussed the difference between his firm’s hedge fund holdings before and after the COVID event.

“We came in 2020 with a defensive positioning. We had low allocation to long/short and high allocation to macro and CTA strategies. In March we tilted the portfolio in favour of risk, we reduced long/short positions, exited CTA all together, we trimmed macro managers were we felt they added less value and added exposure to structured credit which we felt was the hardest hit strategy. We also added exposure to distressed credit managers hoping to participate in this default cycle and added to merger arbitrage,” he told Fundeye.

While Mr van der Erf also didn’t like the look of managed futures funds, Mike Swift, CEO of Albion Capital was quick to come to the strategies defense. He said: "With managed futures we’re looking for robustness of styles. Managed futures managers tend to be very dynamic, it doesn’t predict what will happen, it responds to what happens.”

In terms of positioning coming into 2020, Mr Swift said that low volatility meant that equity markets looked well ‘before the sell-off’.

“We found with our multi-manager portfolios it was a good time for CTAs, fast responders to the short time traders so we could capture that. That’s you want from multi managers the ability to respond to the markets quickly. CTAs responded well to trends in commodities and fixed income as well and did exactly what I expected them to do, we’ll always have a high dispersion among CTA managers even in the trend following space,” he said.

It seems that following 2018’s annus horribilis for the hedge fund sector, this year was going to be even worse. Whether players in the space are putting a brave face on is hard to fathom, Preqin’s data suggests that there was not a complete march to the exit for the asset class but for a year that contains the worse month in history for hedge funds, investors may well be wary. 

Cliff Asness recently distanced himself from the ‘hedge fund’ tag, seemingly to do with the infamous ‘2 and 20’ pricing model. Pension fund Calpers exit from the hedge fund space in 2014 was seen by many as a bellwether for the industry as it was one of the first to invest in the class way back in 2002, many followed. Performance is needed to bring hedge funds back to the fore and we’re certainly not there yet.

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