Also see Q1 hedge fund letters
“Better to be out of a bull market than fully invested in a bear market.” – Bill Henry
Alpha in May driven by short side
Hedge funds as an insurance amidst uncertain markets
As bond prices are expected to decline with further US interest rate hikes, investors may want to use hedging strategies as insurance for their fixed income investments. Investors should welcome interest rate hikes as they suggest economic growth. Otherwise, more of the world will likely be mired in a slowdown like Japan has been for the last 20 years, says Brooks Ritchey, US-based senior managing director and head of portfolio construction at K2 Advisors.
However, bond prices drop when interest rates rise, which may trigger a sell-off in the bond market. Mr. Ritchey notes that rate hikes have triggered a bond market crash in the past. In 1994, for instance, bond markets in the US and several other developed countries suf-fered a sudden and sharp selloff when the Federal Reserve raised interest rates for the first time after three years. "It could happen quicker than you think as so many people own many bonds," says Mr. Ritchey. With the next US rate hike expected in June, he believes investors will start to figure out how the market works. "Even though the fundamentals may not change much, the sentiment will change," he says, adding that hedge funds then have a role in investment portfolios.
Traditionally, investors manage their investment by adjusting their positions in equities, bonds and cash. They add equities if they have an appetite for risk, and turn to the bond market if they are not very positive about economic growth. Cash used to be the third option when investors were unclear about the market, but it's become unattractive now because holding cash offers no yield. Investors are now replacing cash with hedge funds to obtain better returns. Most investors only think of hedge funds when they have a negative view about the market. But according to Mr. Ritchey, hedge funds can also be used as insurance when investors are undecided about the market. Hedge fund managers will find assets that should do better in the future, which can hedge out risks when there is a market decline. Ac-cording to Mr. Ritchey, a good hedge fund portfolio acts a little like preliminary bond insurance as it can make money when the bond market is declining. "You don't know how to time the market, so you have to have the insurance before the typhoon hits," he says.
Preqin: Billion Dollar Club expands by eight in past year, AuM by 6%
The exclusive club of hedge fund managers with at least $1 billion in assets under management continues to expand despite well-publi-cized travails in the industry, according to new research from Preqin. The so-called Billion Dollar Club has grown as new members join and total combined allocations to the hedge fund asset class rise, Preqin said in a statement.
Membership in the group has seen a net increase of eight in the 12 months to June 2017 and now stands at 242, while capital invested in hedge funds by these institutions has grown by 6% over the past year to $805 billion. All told, the Billion Dollar Club collectively accounts for almost a quarter of the total institutional capital allocated to hedge funds, Preqin added. Other key facts from Preqin's Billion Dollar Club Hedge Fund Report:
- Over the course of the past year, 36 institutional investors have entered the Billion Dollar Club while 28 have exited
- Public pension funds account for the largest proportion (28%) of capital allocated by the Billion Dollar Club, and represent the highest number of new entrants to the club (11) over the past 12 months.
- North America accounts for the greatest proportion (61%) of capital invested in hedge funds by the Billion Dollar Club, while Europe-based investors account for just over a fifth (21%), and Asia accounts for 9%.
- Members of the Billion Dollar Club give greater weight to hedge funds within their portfolios. They typically allocate 16% of their total AUM to hedge funds, compared to 14.5% among all other investors.
- However, this represents a decrease over the past 12 months: the average allocation to hedge funds of a Billion Dollar Club member was 16.8% as of June 2016.
- There has been a net reduction in allocations in the past 12 months: 37% of Billion Dollar Club members have decreased their alloca-tions in the past year, while 28% increased them.
"Investor outflows dominated the narrative surrounding the hedge fund asset class in 2016," said Amy Bensted, Preqin's head of hedge fund products, in the statement. "However, despite some high-profile redemptions and withdrawals in recent years, the group of the largest hedge fund investors continues to grow in both number and influence.
"The Billion Dollar Club […] has great influence over the industry; one in every four dollars in hedge funds today comes from this group of 242 institutions," Benstead added. "These investors are increasingly using their collective might to lobby hedge fund managers to im-prove the alignment of interests between the two parties. At a time when fund terms and conditions are in the spotlight, this will ulti-mately improve alignment for all institutional investors in the asset class."
Hedge fund industry growth since 2010
Hedge fund launches and closures
Equity net exposure climbs to new 12-month high
Article by Skenderbeg Alternative Investments
See the full PDF below.