Put Into Perspective – More Money Enters Hedge Funds In December by Bruno J. Schneller, CAIA & Miranda Ademaj, Skanderbeg Alternative Investments
“No single raindrop ever feels like it is responsible for the flood.” — Anonymous
Hedge fund copycats draw record money as clients seek safety
Funds copying hedge-fund strategies to make money are on track to record their best ever net inflows this year as investors look for ways to escape volatile markets.
These funds, known in the asset management industry as liquid alternatives, charge lower fees than hedge funds, allow investors to take out money on a daily or weekly basis, and provide better transparency on how exactly they make money. As a result, both retail investors and institutions have poured money in the funds, especially in Europe, helping them grow faster than the hedge-fund industry.
Investors’ interest is fueled by fears that their traditional stock-and-bond portfolios won’t be able to absorb shocks from market turbulence as the U.S. Federal Reserve prepares to increase interest rates for the first time in almost a decade on Dec. 16 and stock market valuations hover near record highs. Capital flows are stronger in Europe, where investors are also trying to shield their assets from negative interest rates.
“Investors are moving into liquid alternative funds because they want to insulate their portfolios from market swings and be able to take money out if anything goes wrong,” said Peter Laurelli, global head of research at industry tracker eVestment.
The open-end funds, typically designed to provide protection during a market decline, can short sell a security to make money in a falling market and borrow money to increase their bets like a hedge fund. Retail investors can, through a broker or private bank, invest $1,000 or even less. Hedge funds typically require a minimum initial investment of $1 million.
Liquid alternative funds received about $110 billion in the first 10 months of the year, 14 percent more than in the whole of 2014 and exceeding the previous record of $106.6 billion in 2013, according to data compiled by research firm Morningstar Inc. Total assets under management have increased by a 10th to about $715 billion this year after stock-market turmoil in China hit values, the data show. By comparison, assets managed by hedge funds increased by 1 percent to $2.9 trillion in the first nine months of the year, according to data from Hedge Fund Research.
About seven in every 10 dollars invested in liquid alternative funds this year has gone to European funds, boosting assets to 344.5 billion euros.
“The advent of not only low- and zero-interest rates, but now negative interest rates from the ‘safer’ Northern European economies are driv-ers of the increase in interest among European investors,” said Jeremy Beckwith, the director of manager research for Morningstar UK. “The flows in Europe took off in 2014 as the ECB adopted first quantitative easing and later negative rates.”
These “products may even require more due diligence than buying ‘traditional’ hedge funds that have years of demonstrable track records and can often use a much wider spectrum of instruments to not only generate returns, but also manage risk,” said Bruno Schneller, chief investment officer at fund of funds group Skenderbeg Alternative Investments.
More money enters hedge funds in December
Investors pumped money into the $3 trillion hedge fund industry in December, data from the world’s second-biggest hedge fund administrator showed, seeking to capitalize on an increase in market volatility.
The SS&C GlobeOp Capital Movement Index, which calculates monthly hedge fund subscriptions minus redemptions at the start of each month, rose 0.83 percent in December, the largest December gain since 2011. “This favorable reading continues the trend of recent months, indicating that the hedge fund industry is benefiting from heightened market volatility,” Bill Stone, chairman and chief executive of SS&C Technologies, said in a statement.
The SS&C GlobeOp Capital Movement Index represents the monthly net of hedge fund subscriptions and redemptions administered by SS&C GlobeOp on the SS&C GlobeOp platform.
US public pension funds increase investments with hedge funds
Hedge fund managers looking forward to better opportunities in 2016
Many expect to take advantage of widened return dispersions
The prospect of continuing increases in US interest rates, credit defaults and volatility has raised the hopes of hedge fund managers for a happier new year than the last.
Pensions & Investments’ interviews with hedge fund chief investment officers, strategists and allocators in the last weeks of 2015 found that most expect to see wider return dispersion between different strategies and managers in 2016, after several years of return compression caused by macro factors such as zero interest rates, central bank intervention and regulation.
Likely sources of investment opportunity in the year to come, these sources said, will be differences in the pace of economic recovery be-tween developed and emerging markets countries; high, erratic volatility; solid shorting possibilities in many securities, countries and sectors; and high-yield bond and credit distress.
There was some difference of opinion about the hedge fund strategies most likely to do well in 2016, but those cited most often by P&I sources were global macro, long/short equity, event-driven, relative value and European long/short credit.
Pensions & Investments
See full PDF below.