By Nick Evans
The best that can be said for 2011 is that at least it was
not as bad as 2008. And the best that can probably be hoped for
2012 at this early stage is that it is no worse than 2011.
Being a hedge fund manager at the moment is tough, to say
the least. Politics and macro events are adding a
whole extra layer of investment risk, making most fundamentally
based strategies extremely hard to deploy in a constantly
changing risk-on/risk-off environment.
But being an investor is arguably even tougher. Knowing
where to allocate money and when; deciding which
managers to select; understanding what managers are doing and
why it either is or isnt working, when the managers
themselves often cant figure that out; judging when to
sit tight and when to bale out. These are hard choices to make
at the best of times. At a time like this, they are fiendishly
The simple fact is that hedge funds did not generally
perform as well as had been hoped or expected in 2011. Overall
returns were disappointing. Many brand-name managers that
should have done well in 2011 signally failed to do so. And
success or failure for investors in strategies like long/short
equity or macro was down more to individual manager exposure
than to strategy allocation with huge dispersion between
the good and bad performers.
So, just as individual stock-picking is said by many
long/short managers in their own defence to be almost
impossible in the current macro-dominated climate, it is not
surprising that many investors are also questioning their
ability to pick individual managers at the moment.
This may be one additional reason why so many investors,
particularly in the institutional space, are favouring
systematic and quant-based investment processes over
discretionary strategies that rely so heavily on the ability of
key individuals to read things right in such a challenging and
Aside from fixed income and emerging-market debt,
quant-based equity, market-neutral and stat arb was one of the
few areas that performed well in 2011 with most quant
equity strategies outperforming their peers in the
fundamental/discretionary space by a margin.
CTAs and systematic managed futures funds did not do so well
in 2011. But the case for investing in CTAs has already been
made by what they achieved in 2008. After years of scepticism
about black boxes and lack of transparency, investors now buy
the idea of negative correlation in times of extreme equity
market stress and money is pouring into CTAs.
Not all discretionary strategies did badly in 2011, to be
sure. There were many notable performers in equity, in macro,
in credit and in other areas. But most did not perform well
and, for many investors, the odds on being with the
right ones at the right time seem to have become increasingly
Unlike with discretionary funds, which tend to rely on an
individual or a few key individuals, systematic and
quantitative processes are exactly that a process,
usually computerised and part of an institutionalised DNA, and
one that pretty much eradicates key-man risk.
Furthermore, they appear to generate returns that add
genuine diversification and lack of correlation to
investors portfolios at a time when investors really need
both of those things and the same cannot be said by many
discretionary managers, whose correlations with markets have
been rising to uncomfortably high levels.
Besides the growing shift into systematic strategies, the
same drivers may also lead to increased take-up in hedge fund
replicators and other quant-based ways of gaining broad hedge
fund exposure without having to select individual managers in
And secondary market activity may also rise rise, as
investors take the view that hedge funds are now more of a
market than a club these and that access to managers should be
freely tradable rather than seen as some kind of privilege.
All of this could, of course, change quickly if the market
and macro environment were to change and the potential
for upside shocks is probably as great as for further downside
But, at a time when there are many high-quality launches
around from managers with proven pedigree and when there are
different ways for investors to gain hedge fund exposure other
than backing individual managers, the pressure on many funds
even those who have performed excellently over the years
to raise their game in 2012 will be intense.