By Nick Evans
If the first few weeks of the year are anything to go by,
2011 is going to be anything other than plain sailing for
managers and investors.
Those expecting a benign start to the year had a nasty
wake-up call in January. European equity markets saw massive
sector rotation. And emerging markets suffered a sudden
outbreak of volatility on the back of unrest in north Africa
and rising inflation worries in the major emerging economies
like China and Brazil.
Market benchmarks overall did not move all that much on the
month, which made it an even worse start to the year for the
many long/short equity managers that kicked off the year with a
painful and somewhat surprising loss.
But the level of individual stock volatility was intense.
And the events of January have further highlighted the
overriding challenge for managers in this current febrile
market environment of getting both the macro and the micro view
right and the ever-gathering cloud of tail risks that
have the potential to blow almost any type of strategy off
Wherever you look there are causes for concern at a
big-picture level: repeated rate rises in China; global
inflationary (and deflationary) pressures; food and commodity
price escalation; currency wars; still-rumbling sovereign debt
crises in Europe and the G10; fast-growing cracks in the US
municipal bond market; social unrest in the Arab world and
other emerging markets; and, most of all, the effects as and
when interest rates start to tighten again.
On top of all these are very deep-seated anxieties about the
impact of QE and economic stimulus programmes in several major
economies (and, conversely, austerity programmes in several
others) and the likely timing and consequences of their
eventual withdrawal and a gnawing sense of unease that
the deleveraging that is so badly required at corporate,
financial and sovereign levels has not even really begun.
Adding a further layer of angst and uncertainty at a very
unhelpful and unwelcome time is the constant interference by
politicians and regulators in the financial system
whether through the AIFM directive in Europe, the Dodd-Frank
Act in the US, government bank levies, bonus-bashing or general
All this tinkering will probably just result in a raft of
ill-thought-through new banking regulations the only
sure outcome of which, at some future point, will be a whole
new series of unintended and probably disastrous consequences,
just as happened the last time around.
And it will also almost certainly act as a significant brake
on the economic growth and recovery that is so urgently
required to get out of this mess, by shackling the financial
system at a time when its vibrancy is most needed.
Set against this rather less than rosy backdrop, though, are
three fundamentally very bullish drivers. One is the fact that
so many companies seem to be in very healthy and increasingly
Another is the continuing wave of liquidity into risk assets
as investors, sick of holding cash in an inflationary and
zero-rate environment, capitulate into owning equities and
corporate bonds in a desperate hunt for yield and returns.
And third is the growing evidence of economic recovery in
the US and elsewhere, although it would be disappointing if all
the government injections were not stimulating some kind of
So, all in all, it is not exactly an easy environment in
which to be managing money and one in which the upside
and the downside risks are equally strong. But that is what
hedge fund managers get paid to do and that is why the
best ones are worth every penny.
Protecting investors capital and generating good
risk-adjusted returns are not easy things to achieve at the
best of times not least since hedge fund investors have
a habit of wanting to participate in the upside, but not in the
In this kind of climate, they are exceptionally difficult
and, in a period when conflicting headwinds and
tailwinds are swirling around with such speed and severity, all
the more so.
As our EuroHedge Awards 2010 report in this issue shows,
there are many individual funds and firms that achieved these
aims with impressive results last year which was not an
easy year either and who have shown remarkable
consistency over the years.
It will be fascinating and revealing to see who succeeds in
doing this again in what already looks certain to be another
very challenging year and how they succeed in doing so.
those who get it right will certainly have earned their fees
many times over.