Investors Don’t Change Strategies Based on Prior Returns
With credit markets thawing and government stimulus plans taking effect, financial markets have seen strong gains this year. The HFRX Global Hedge Fund Index indicates that the hedge fund industry is up 11.89 percent year to date. So it seems reasonable to ask, what strategies are in demand among alternative investors and how are they making their selections?
Performing a bit better than the Global Hedge Fund Index, long/short equity funds are returning 13.2 percent on average. These funds have been specified in 59.2 percent of the mandates received by BHA analysts in 2009. Given the strategy’s above average returns, this is not surprising.
Complex hedge fund strategies, which often rely on intricate trading methods and advanced microeconomic analysis to capitalize on price differences across markets, can provide excellent returns in favorable markets. But regardless of their recent performance, these types of funds remain a minority interest in the marketplace. For example, the best performing strategy has been convertible arbitrage, returning 37.7 percent year to date. However, demand for convertible arbitrage funds remains quite low: only 16.9 percent of the mandates received by BHA analysts in 2009 have specified the strategy.
Conversely, the HFR Macro Index has returned a dismal -7.42 percent year to date. Yet, of 1,872 mandates collected from 1,095 companies thus far in 2009, 854 have indicated an interest in global macro funds. In other words, of the mandates received this year, 45.6 percent have stipulated a fund type that has woefully underperformed relative to its competitors.
Many industry professionals often claim that investors chase returns, so changes in demand come about months after changes in performance. If this is the case, convertible arbitrage may be awaiting its big debut, while global macro fund managers may want to pack up shop.
However, it seems unlikely that this will be the case. Looking at data gathered by BHA analysts, it is apparent that certain investors feel comfortable investing in more complex strategies, while others prefer straightforward funds. Thus, it seems that demand for fund strategies is not significantly affected by their prior performance.