Sector Focused Funds: Providing Ideal Diversity for Investors
Equity-based hedge funds have been in high demand this year, due to their typically high liquidity, combined with strong performance numbers throughout much of the year. Investors that maintain a heavy bias towards equity-based investments in their hedge fund portfolios often look to diversify their holdings through investments in certain sector-specific funds. BHA has spoken with many investors that find the healthcare and energy sectors attractive because government regulations could cause a lot of movement in these stocks. But BHA has also spoken with other investors that, for the same reason have purposefully minimized their exposure to these sectors, arguing that government intervention could adversely affect the potential for the specific sectors that many view so favorably.
The HFRI EH: Sector – Energy/Basic Materials Index is up more than 25 percent year to date after being down almost 19 percent last year. The HFRI EH: Sector – Technology/Healthcare Index is also up almost 15 percent this year. The more aggressive investors see tremendous opportunity for returns in these sectors to continue to climb during 2009, more than making up for losses in 2008. Hedge funds focusing on these sectors offer investors both long/short equity and event-driven investment strategies. Any changes in government policy with regards to health care or energy could cause significant price fluctuation in these sectors during the next several months. BHA has spoken with many funds of funds and wealth advisors that have an appetite for this type of volatility, because they believe the return potential is well worth the risk.
Analysts have also spoken with investors taking a much more conservative approach in this environment. Investors with long-term investment horizons, such as government pension funds and family offices, are choosing to avoid investing in sectors that are highly sensitive to government policy and regulation.
Funds focusing on retail and consumer goods or technology and media are more independent of government actions and, thus, the level of standard deviation will remain consistent with historical figures. These sectors are less correlated because changes in government regulation have little effect on the number of movies consumers see or the goods they purchase on a daily basis.
The current market provides investors with a range of opportunities to satisfy their risk/return appetites. Investments in hedge funds focused on health care and energy may require investors to take on additional volatility, but the returns these funds provide may justify the risk. For other investors, long-term performance and stability is the goal, in which case investment in uncorrelated sectors is a better fit.