Hedge Funds an Investment for All Markets
The summer months are notoriously slow for funds and investors alike. Managers take advantage of the opportunity to revamp while investors review their allocation strategies. Both spend time away from the office.
Despite this industry wide slowdown, analysts at BHA have spoken with and received mandates from more than 200 hedge fund investors over the past four weeks. That is a large number of mandates for a summer period, so the research team decided to take a closer look at this trend and see what was driving it.
After an abysmal May, hedge funds saw their performance improve in June and they had a positive return in July.1 This no doubt attracted some investors. Perhaps more significant, however, was the fact that investors were seeing new reasons to put money into hedge funds, since more managers have been using strategies that preserve capital.
Hedge funds have traditionally been a vehicle that provides investors with outsized returns. Although some investors may be in search of riskier strategies in attempts to recoup some of their losses from previous months or years, BHA analysts have noticed increased investor interest in safer strategies, such as fixed income and managed futures.
Over the past four weeks, more than 20 percent of the hedge fund investors analysts spoke with expressed an interest in fixed income or fixed-income arbitrage strategies. In what analysts perceive as a positive market indicator, many investors looked at the pricing inefficiencies of government and corporate debt with various credit ratings in hopes of catching decent yields. Other investors considered fixed-income arbitrage. No matter which they choose, it was clear that investors were focusing on capital preservation and steady returns instead of extreme volatility plays.
In additional to fixed-income strategies, investors sought out CTA/managed futures funds as well. During the past month, more than 35 percent of hedge fund investors expressed interest in managed futures. For the most part, these funds are inversely correlated with stocks and bonds. In market conditions where inflationary concerns exist, managed futures that track foreign exchange rates, gold prices, and the like provide an excellent hedge to the situational damage that theoretically could be done to equities and bonds. Many investors view managed futures as another way to mitigate risk in their portfolio instead of trying to achieve larger returns.
In short, hedge funds continue to attract an array of investors despite market conditions because of the funds’ ability to provide returns as well as hedge other portfolio positions. While strategies will vary depending on the investor’s appetite for risk, hedge funds continue to remain a popular investment vehicle.
1 Eurekahedge, Performance Tables, August 17, 2010, http://www.eurekahedge.com/indices/default.asp.