By Nick Evans
Nice as it was for equity strategies at least, if not
for CTAs or macro funds Octobers powerful risk-on
rally did not last long.
The new normal of volatile markets and
whipsawing investor sentiment has returned with a bang.
And November has been a case of back to business as usual in
this exceptionally tough year, with a growing realisation that
the extremely challenging and hazardous investment environment
could be here for a while.
Far from erecting a firewall to contain the Eurozone
financial crisis, all that the European and G20 leaders
succeeded in creating was a wind tunnel that fanned the flames
from Europes burning periphery straight to Italy and
Spain and onto France and other core Europe countries
like Belgium and the Netherlands too.
Where and how will it end? All bets are off for the moment.
The building is ablaze and the exits are locked for now
at least. Conflict and recrimination are rife in Europes
union and the signs look increasingly ominous.
Meanwhile the US seems stuck in a political and economic
quagmire while, depending on who you talk to, China is
either going to be the saviour of the world or the source of
its own debt, real estate and shadow banking-fuelled collapse
of potentially epic proportions.
So comparisons with 2008 when what was on the cards
was the collapse of the global banking system, prevented only
by measures that now appear to threaten the collapse of the
global sovereign debt system are inevitable.
The boomerang is back, big-time. But, for hedge funds at
least, the comparison is misplaced: in 2008, investors were
trying to run away from hedge funds as fast as they could; in
2011, they seem to be running towards them with increasing
The difference is total. Three years ago, there was a
panic-driven dash for cash. Investors, fearing the meltdown of
the global payments system, were desperate to liquidate
everything they possibly could.
Three years on, with interest rates at zero and inflation
rising, cash is not seen as the solution although a new
and potentially worse banking crisis could trigger another
stampede. And the prospects for pretty much all asset classes
are uncertain at best, with every bit as much downside risk as
Instead, what investors are finally waking up to at all
levels institutional, individual and intermediary
is that it is not the asset classes that you choose to allocate
to that really matters, but the way in which your money is
managed within those asset classes.
So hedge funds, although by no means perfect or socially and
politically popular, are increasingly seen as the most likely
safe port in a storm that could rage for a long time yet
through which people will have to continue trying to invest and
protect their savings and wealth in an increasingly complex and
Redemptions and recycling there may be in the short term.
That is inevitable. Some hedge funds have done very well. Some
have done very badly. That is the nature of the business. But,
overall, hedge funds have broadly done what they promise to do
which is to participate on the upside and protect on the
And all the recent surveys indicate clearly that investors
are planning to put more of their money into hedge funds (or
absolute return funds or active funds or UCITS
funds or however anyone chooses to market them) rather than
less. It may take time. But it will happen.
In a world where all investors are acutely aware that
investments can go down as well as up, the good hedge fund
managers (whose strategies are driven as much by fear of how
much they and their investors could lose as by greed for what
they might gain) look like the best guardians of peoples
savings and wealth and their future expectations and
Whatever hurdles the politicians might erect through
the aimless AIFM directive, the half-baked (although perhaps
politically understandable) financial transactions tax, or the
absurdly convoluted Dodd-Frank Act hedge funds will find
a way to survive and prosper, although the reality is that any
increased costs will simply be passed onto investors, which is
the last thing that politicians should wish to engineer.
There are flaws in the hedge fund business model and
there may need to be changes to ensure true and long-term
alignment of interests between managers and investors, whose
objectives are not always one and the same.
And hedge funds will come and go as they always have.
But, when all is said and done, hedge fund managers generally
do well because their customers do well. If the same had been
true about the rest of the financial industry, we might not be
in the mess that were in.