Put Into Perspective – Lansdowne, Odey Said To Lose As Market Turmoil Hits Hedge Funds by Skenderbeg Alternative Investments
“The last duty of a central banker is to tell the public the truth.” — Alan Blinder, former Federal Reserve Board Vice Chairman
Lansdowne, Odey Said To Lose As Market Turmoil Hits Hedge Funds
As European hedge funds that bet on stocks post the worst start to the year since at least 2000, managers from Stephen Roberts to David Craigen are said to have lost more than 10 percent.
The Lansdowne European Equity Fund, with $517 million of assets managed by Craigen, lost 11.4 percent through Feb. 19, a person with knowledge of the matter said, asking not to be identified as the returns are private. A Lansdowne spokesman declined to comment.
Roberts’ Horseman European Select Fund, which managed $566 million at the end of December, fell 22 percent in the first two months of the year, a spokesman said. Crispin Odey’s main hedge fund, which oversees 1.6 billion euros, declined by 4.4 percent, a spokeswoman said.
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European equity long-short hedge funds lost an average of 3.9 percent through February this year, their worst decline in the period since Eurekahedge began compiling data 17 years ago. Losses when shares fell in January were compounded when managers decided to increase their short position in February, just before stocks rallied. Investors short companies by selling borrowed stock and seek to profit by buying it back later at a lower price.
“There was hardly a space to hide over January and February,” said Miranda Ademaj, chief executive officer of fund of hedge funds Skenderbeg Alternative Investments. “A lot of long-short equity hedge funds, especially long-biased fund, suffered losses as stocks declined across sectors.”
Global equity markets lost about $6.3 trillion in the first two months of the year, according to data compiled by Bloomberg, as investors grew concerned at slowing economic growth in China, negative interest rates in Japan and Europe and the impact of a decline in oil prices on corporate balance sheets and banks.
Banks stocks that are members of the STOXX Europe 600 Index led the falls, losing almost a fifth of their value, the data shows.
Most Consistent Performing Hedge Funds
The hottest hedge fund strategy tells you everything you need to know about markets right now
Investors clearly can’t make up their minds about where stocks are heading in 2016. The good news is that there’s a hedge fund strategy for that, and it’s set to be a very popular approach.
Fundamental equity market neutral funds, or hedge funds that take an offsetting number of longs and shorts with the goal of generating alpha no matter the market direction, are in fashion, according to Deutsche Bank. The bank’s global prime finance group surveyed 504 hedge fund allocators (fund of funds, pension funds, family offices, endowments, foundations, etc.) who collectively manage and/or advise on $42 trillion in total assets and $2.1 trillion of hedge fund assets. The hedge fund industry is made up of many different types of strategies — long/short equity, activist, event-driven, distressed credit, global macro, the list goes on. Allocators have to decide which strategies are poised to perform. Deutsche Bank found that the “most in-demand” strategy was the equity market neutral strategy.
About 32% of the respondents said they were increasing their exposure to fundamental equity market neutral managers, up from 17% in 2015. A further 18% of the allocators were increasing their exposure to systematic equity market neutral funds, up from 11% in 2015. Toward the tail end of 2015, investors had the view that equity markets might be volatile and that there would be opportunities on the short side. Investors are expecting more volatility in 2016, and market neutral funds are one way to manage that.
“Typically, market neutral managers tend to have more diversified portfolios with more names,” Naidoo said. “Investors are utilizing that diversification to manage a volatile environment.” These sorts of hedge funds take long positions in stocks they think will outperform the market and short positions in stocks they think will underperform, aiming to hedge out broader market moves. In finance lingo, they aim for a beta to equity markets of zero. That’s appealing to investors when the market is volatile. According to the results, most of the respondents expect hedge funds to outperform equity markets in 2016. What’s more, 41% of them plan to increase their hedge fund allocations over the next 12 months, up from 36% who increased in 2015.
Survey shows institutional investors intend to increase hedge fund allocations in 2016
A recent survey conducted by Context Summits showed that 79% of institutional investors intend to increase their hedge allocations in 2016. The survey was conducted at the Context Summits Miami 2016 and included approximately 200 investors. The survey also showed that 96% of investors plan to make allocations to two or more funds in the coming year. The conference was attended by approximately 500 investors and 450 fund managers and the combined assets under management of those in attendance was over $1.5 trillion.
“This survey provides invaluable insight into allocation trends for 2016 and offers a snapshot of the conversations between managers and allocators at our Summit,” said Mark Salameh, Co-Founder and Chief Executive Officer of Context Summits. “We believe this year presents a unique opportunity for many managers to distinguish their story and attract institutional capital, particularly considering findings in this sur-vey coupled with the current macro environment and broad range of strategies represented at our Summits.”
Alternatives may help investors win more by losing less
2016 is already looking to be a bumpy year. While “market pros” use the mainstream media to assuage investor fears, alternative investors often tend to be contrarian by nature, and perhaps a bit more savvy. Jonathan Belanger, Director of Research for AlphaCore Capital, is in the latter camp: he thinks investors are generally underestimating risks in the stock and bond markets, while alternative strategies have the po-tential to protect capital – and this is the thesis of his recent white paper, titled Win More by Losing Less.
The world has evolved
The Internet Revolution has changed the way the world works as much (if not more than) its predecessor, the Industrial Revolution. Perhaps the former could even be seen as a continuation of the latter, as progress has been geometric or even exponential in the past 200 years, after millennia of comparatively little change. Just in the past 20 years, whole industries have been transformed and geopolitics and interna-tional finance bare virtually no resemblance to the world of a few decades past: and yet, investors still think a “60/40” buy-and-hold strategy is wise?
Mr. Belanger certainly does not. Instead, he favors a well-constructed portfolio combining significant exposure to alternatives and traditional investments. Such a portfolio, in his view, has the ability to outperform over time.
Uncompensated risks in traditional portfolios
Many investors want to cling to the belief that a “diversified” portfolio of stocks and bonds will yield their traditional 8-10% over the long term, with bonds providing downside protection during bear markets for equities. These investors ignore mainstream projections that stocks are likely to earn just 0-3%, annualized, over the next ten years, and bonds around 2% per year. Ultra-low bond yields don’t provide much of a safety net, either, and in Belanger’s view, those expected returns don’t justify the risks. There is very strong empirical evidence that equity valuations and bond yields are good predictors of future returns for stocks and bonds.
By contrast, a diversified portfolio that includes a variety of alternative strategies – each with low correlation to stocks and bonds, and to one another – should outperform. The low correlations of these assets and strategies should help investors mitigate downside risk, especially in turbulent markets.
Eric Bennett’s top 10 manager search and selection tips
Giving money to an investment manager is not something done casually. It may be tempting to chase performance, but if you’re not careful you’ll give your client’s money to a manager who was merely lucky and is destined to underperform, or even worse, is a con artist like Bernie Madoff. As a fiduciary, it’s your duty to conduct sufficient manager due diligence to reduce the probability of disastrous or disappointing outcomes. At the Asset Allocation for Private Clients conference held in Atlanta this October, Eric Bennett, CFA, chairman and CEO of Tolleson Private Wealth Management, gave his top 10 tips for manager due diligence before and during engagement. According to Bennett, following these guidelines could help you avoid some common manager-selection pitfalls.
10. Remember you are investing in people, not just performance.
Performance results are, by definition, backward looking, but hiring a manager is a business relationship like any other, and if you engage a manager of poor character, you will find your problems run much deeper than underperforming your benchmark. In good times and bad, integrity matters.
9. Have a well-defined process, and stick to it.
Develop your checklist for manager eligibility, and then stick with it. If you find yourself tempted to waive one of your requirements, examine the reason very closely. This might be an indication that you are responding emotionally to some attribute of the manager and should be a warning sign to you.
Finding managers with talent and integrity isn’t easy, so don’t rush. Don’t take shortcuts in your process to meet an arbitrary deadline, and don’t be rushed by the prospect of an oversubscribed fund. Consider if a small “seed allocation” might be an appropriate way to get to know your manager before making a full commitment.
7. Make sure the strategy has an opportunity set.
Innovative, alpha-generating strategies may not persist once word gets out. Convertible arbitrage, for example, worked well until the market wrung the inefficiencies out of the convertible bond market, but what was once alpha has become beta. Before making an allocation to a strategy, consider what might cause its ability to generate alpha to be short-lived.
6. Go see their office.
Never give money to a manager you haven’t visited. Is the business orderly and well run? Do the managers work well together or is there tension in the office? If something’s not right, you’re more likely to detect it with a visit.
5. Ask what percentage of their own money is invested in their strategy, and look for meaningful changes in partner capital over time.
All things equal, you want your managers to have “skin in the game,” so that their interests are as aligned as possible with yours. Are general partners pulling money out? If so, this doesn’t have to be a deal breaker, but the reasons should be thoroughly investigated.
4. Watch for strategy divergence.
If your fund has been 25% net long for three years and is suddenly 75% net long, you should ask for an explanation. If there are significant changes in the types of holdings, or changes in concentrations of certain sectors or asset classes, these are signs of strategy divergence, and you may not be getting what you expect from a manager.
3. Beware of growth in assets under management (AuM).
Strategies that work in small volumes may not be as successful on a larger scale, but a big change in AUM might also suggest the manager is disproportionately focused on asset gathering instead of investing. Also, beware of big sideline interests that might compete for your man-ager’s focus — the purchase of a NBA basketball team, for example. Distracted managers can become average very quickly.
2. Do a background and credit check.
An easy screen for potential red flags that you should do as a matter of course. A simple public documents search could save you major head-aches down the road.
1. Understand what drives performance.
You’ve heard it before, but don’t chase performance! Most top-quartile managers will not hold their spots, and research suggests that a sig-nificant percentage will perform below the median in the future. Rather, examine track records closely and try to understand what is driving performance. Beware of concentrations in last year’s winners, and closely examine down periods, and outlier quarters and months. If you use manager performance as a window into understanding a manager’s analytical process, you’ll make better, long-term decisions and will be less likely to bolt a skilled manager experiencing temporary, short-term underperformance.
Bennett’s bonus tip: As long as human decision-making remains the core of investment management, you need to understand psychology in order to truly understand your fund managers.
See full PDF below.