By Nick Evans
The summer lull is over - after the most drama-free August,
in the financial world at least, for many a year - and it's
back to reality with a strong sense of déjà
All eyes remain on the central bankers and their
'unconventional' monetary policies, with markets increasingly
hooked on liquidity interventions and increasingly despondent
about global growth prospects.
In the US, Bernanke has pulled the trigger on QE3 - hoping
to kickstart (again) a US economy that badly needs a boost
ahead of what is shaping up to be the most polarised, divisive
and plain nasty election in years.
In Europe, Draghi has also delivered what the markets had
been clamouring for - despite opposition from an irritated
Bundesbank - with his potentially game-changing OMT bond-buying
programme (the successor to the SMP). And the BoJ and the BoE
are both in on the act too.
Acronyms abound - not least in Europe, where the alphabet
soup of financing facilities and mechanisms set up to deal with
the debt crisis is mind-boggling. But the only appropriate one
at this stage is perhaps the famous army term of SNAFU
(situation normal, all f***ed up).
Although market sentiment has been upbeat of late, fear is
never far away. And, with two thirds of another difficult year
now gone, hedge fund managers are still on trial as to whether
they can deliver the goods for investors in a market
environment where the 'new normal' seems to be a bi-polar
psychology that veers between outbreaks of panic and
Given that global markets were up by 8% even before the
central bank-fuelled September rally kicked in, the fact that
the average European hedge fund was up by only 2.5% to the end
of August does not present a very compelling case for investing
with alternative managers, if returns are what investors are
Some types of strategies have done much better than that -
such as value-based equity managers, many credit and converts
funds, a few selected macro, CTA and trading strategies and so
on - and there are plenty of individual funds that have
generated genuinely impressive double-digit performance in a
very testing environment.
But, for most investors - certainly for the institutional
pension fund-type clients and the super-wealthy individuals
that increasingly dominate the hedge fund investor universe -
returns are not the primary concern at the moment.
Risk is the over-riding worry - the risk of another big
market crack; the risk of a renewed systemic crisis in the
financial sector; the risk of a political and economic
catastrophe in Europe; the risk of a major geo-political event
in an unstable and volatile world; the risk of inflation
eroding capital; the risk of a global economy with flagging or
virtually non-existent growth.
Ever since hedge funds began, those who see them as an asset
class have loved to debate over whether they should be seen as
an equity-type or bond-type investment. For many years, this
seemed like a rather arcane argument that was arguably missing
a wider point - which was that hedge funds represent individual
styles of managing money, not an asset class per se.
But perhaps, in an environment like this, that question is
only fundamental to investors' shifting perceptions of what it
is that they want hedge funds to do for them - and what they
are prepared to pay them for doing it.
In an ultra low-rate, low-growth, low-confidence climate,
aspiring to achieve outsized equity-type returns looks to be a
tall order without taking some fairly outsized risks - while
equities appear to have as much downside as upside potential
and top-quality government bonds must surely be nearing the
point where they can only be seen as offering 'return-free
Against such a backdrop, providing bond-style downside
protection with modest, low-volatility positive returns is not
such a bad prospect - assuming, of course, that hedge funds
avoid the worst of all worlds by contriving to deliver
bond-type returns with equity-type risk.
From the point of view of managers without sufficient scale
to be able to rely on management fees to keep their businesses
ticking over, this may not be a terribly appealing prospect.
But, for investors, that may well be what they are looking for
in a climate where managing risk, preserving capital and
minimising volatility are the paramount objectives - and when
they already have plenty of exposure to market directionality
elsewhere in their portfolios.
So perhaps it is that more than anything that is persuading
investors to keep faith with their hedge fund allocations -
despite the less than stellar performance by most of their
Paying 2% and 20% (or variants thereof) for negligible
absolute returns may not be ideal over the long run. But if -
in the shorter term - it offers some protection against another
potential catastrophic loss, many investors may be concluding
that it is probably a price worth paying.
Then again, if the risk rally keeps going....