Investors Raise Hedge Funds Bets In February by Bruno J. Schneller, Skenderbeg Alternative Investments

“Be more concerned with your character than your reputation, because your character is what you really are, while your reputation is merely what others think you are.” – John Wooden

Investors raised their allocations to hedge funds in February after pulling out money a month earlier, data showed.

The SS&C GlobeOp Capital Movement Index, which calculates monthly hedge fund subscriptions minus redemptions, rose 0.63 percent in February, compared with a fall of 3.28 percent in January.

“Net flows were positive for the month of February, with capital activity in line with historical averages,” said Bill Stone, chairman and CEO of SS&C Technologies.

Reuters

Hedge Funds

Equity Long/Short: Neutral/Overweight

While our central case is that equity markets will be supported by a relatively benign global liquidity environment we expect greater equity market volatility during 2015. This is because the first interest rate hike in the US will, in all likelihood, be upon us within 12 months. We therefore suggest accessing both managers operating with a low net exposure book and managers seeking alpha from a reversion of the relative sector valuation adjustment which has arisen due to the unexpected fall in long-term interest rates during 2014.

The US equity market rally of 2014 has been led by a relatively select number of companies within the main indices. At the risk of generalizing, these companies reside in the health care, utilities and technology sectors. In contrast cyclicals and those other sectors most aligned with a US recovery have largely missed the rally in 2014.

Given that our central case is for US economic outperformance associated with a rise in interest rate expectations, we would expect a revaluation of these industries by market participants relative to secular growth and yield alternative sectors.

In Europe markets would be expected to be helped along by further action from the ECB early in 2015. Expectation of QE and in lieu of the recent stress tests our managers are finding stock-picking opportunities within financials – banks and insurance companies in particular. Consolidation continues in the telecommunications sector creating further opportunity.

Positive developments in corporate governance in tandem with significant domestic asset allocation decisions into equities should be supportive for Equity Long/Short strategies in Japan.

We are wary of an overweight allocation to the typically longer biased Emerging Market strategies. Historically, Emerging Market equities in aggregate have underperformed during a stronger US dollar/weaker oil price cycle which we are currently experiencing.

Equity Market Neutral: Overweight

Fundamental Equity Market Neutral strategies have fully recovered from the hiccup in March/April this year and are delivering consistent positive performance through both rising and falling equity market months. This is because fundamentals are reasserting themselves as a determinant of company valuations in equity markets. We believe this dynamic, allied with a relatively uncrowded operating environment, will be supportive for fundamental Equity Market Neutral returns.

We remain wary of the vulnerability of some approaches to elevated take-over activity as backward-looking models are likely to be short target companies that are subject to speculative price pressure.

While equity market volatility remains one of the cheapest asset classes we expect Statistical Arbitrage managers to benefit from its intermittent rise. After these spikes, strong returns can be made as correlation drops in tandem with rising stock price dispersion.

Hedge Fund Insight

Hedge fund assets to surpass USD3bn by year end, says Deutsche Bank survey

Hedge funds assets are expected to surpass USD3 trillion by year end 2015, growing a further 7%, according to Deutsche Bank’s 13th annual Alternative Investment Survey.
Deutsche Banks’ Global Prime Finance business polled the views of 435 hedge fund investors, representing over USD1.8 trillion in hedge fund assets under management (AUM), for the survey which also reveals that institutional investment in hedge funds is set to increase, with 39% of these investors planning to increase their allocation to hedge funds in 2015.

Manager selection is becoming increasingly important, as the gap between outperforming and underperforming hedge funds widens. While the average hedge fund returned 3.33% in 2014, the top 5th percentile generated returns greater than 22%.

Investors risk/return expectations for traditional hedge fund products continues to come down in favor of steady and predictable perfor-mance: only 14% of respondents still target returns of more than 10% for the hedge fund portfolio, compared to 37% last year.

Some 30% of hedge fund respondents by AUM plan to increase investment in Asian managers over the next 12 months, up from 19% last year. Even more noteworthy is the growing percentage of investors who see opportunity in China, up to 25% from 11% by AUM, year-on-year. India is expected to be a key beneficiary of flows, with 26% of investors by AUM planning to increase exposure to the region, whereas only 4% said the same last year.

Allocators from 26 different countries completed the survey. Approximately half of responding investors manage more than USD1 billion in AUM, and 20% manage over USD5 billion.

„Hedge fund managers who continue to focus on alignment of interests with the allocator community will have an increasingly competitive advantage as our industry grows and evolves,” says Murray Roos, Co-head of Global Prime Finance at Deutsche Bank. „Reward for alpha generation and co-investment opportunities will be key factors in building strong partnerships between limited partnerships and general partnerships.”

Hedgeweek

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