The hedge fund world counted its second worst year in 2011 when it not only trailed the S&P 500 index but also lost overall. However, 2012 has served as a much needed rebound, which hedge funds covered their losses and posted some good returns.
The world’s economic recovery has been relatively lackluster; however, it has serves as a good precedent for future performance. Natixis’ Economic Research notes the same while singling out eurozone’s OMT program and Fed’s QE3 program as the most influential contributors to the upward trend in hedge fund returns. A similar conclusion was reached in UBS hedge fund roundup of 2012.
Overall the HFRI index rose 6 percent in last year. Hedge funds particularly gained as a result of long investments in the class of event-driven, L/S equity and emerging market strategies. The under-performing strategies of last year were CTAs and Short-Bias.
Natixis has a notably optimistic outlook for 2013 with significant growth projected in U.S. The macroeconomic indicators like, labor market, housing and re-industrialization, all point to a clear and structured recovery in the U.S. (see chart below). Moreover the shale gas boom in America has also reduced production costs, compared to other major industrial countries.
On the downside, the U.S. economy is vulnerable to volatility until a long term solution of fiscal cliff is reached. Analysts are expecting the economy to tighten in 1H2013 and later improve in the second half of the year. A similar opinion was posted in BAML’s hedge fund monitor’s analysis of 2013. Natixis forecasts 1.8 percent rise in U.S. GDP in 2013.
For Emerging Markets, the outlook is largely cautious as deteriorating balance sheets and rising inflation pose major risk. However, Natixis forecasts an 8 percent rise in GDP in China, 3.4 percent rise in Brazil and 4.3 percent incease in Asia overall (excluding China and Japan).
In Europe, the major fundamental risks have been averted by ECB’s bond buying program. However the upcoming elections in Italy and Germany and Greece’s debt sustainability can trigger problems. Natixis does not expect a smooth upward ride for sovereign bond yields in European countries where risk premium and spreads may widen in the present year. They are predicted negative GDP numbers for Italy, Spain and France while Germany could post a 0.6 percent rate increase. Overall GDP growth in eurozone is expected to decline 0.5 percent in 2013.