May was a difficult month for investors, to say the least. While hedge funds again outperformed the dismal equity market, the majority trimmed any year-to-date gains. The European debt crisis combined with the ever-increasing environmental disaster in the Gulf of Mexico, contributed to an 8.2 percent drop in the S&P 500, while the HFRX Global Hedge Fund Index reported an average decline of 2.7 percent.1
BHA analysts have heard grumblings from investors for some time about a dip in equity markets, so it comes as no surprise that a number of investors are presently evaluating short-bias managers. Sophisticated investors, in a constant search for the elusive alpha, commonly look to a manager’s short positions to assess skill.
The director of investments at a $1 billion U.S. tax-exempt organization, which has been very active in its foray into alternative investments, is particularly interested in sourcing successful short-bias equity managers. Allocations are not expected until at least the third or fourth quarter, however, they may range from $5 million to $15 million.
The chief investment officer of a U.S. family foundation is actively researching short-bias funds for its planned addition of two to three new managers over the next several quarters.
And across the pond, at a $3 billion, London-based asset management firm with over $400 million dedicated to hedge funds, an investment manager expects short-bias funds to profit substantially over the remainder of 2010. He is focusing on highly skilled managers with a track record of at least three years.
Dedicated short-bias funds undoubtedly took advantage of the falling markets in May. If investor sentiment is any indicator, they may be poised to produce significant gains in the near future.
1 FINalternatives, “Most Hedge Funds Hurt in May,” June 1, 2010.
