By Nick Evans
It is difficult enough for hedge fund managers to find ways
to make money, or avoid losing money, against such a volatile
and uncertain market and macro backdrop as the
disappointing European hedge fund performance so far this year
For fund of fund managers faced with the added
challenge of providing end-investors with a return net of that
extra layer of fees, while having to retain sufficient
liquidity to avoid a repeat of the liquidity mismatch that
nearly killed them in 2008 the problem is worse.
Performance numbers this year make for sobering reading.
After another bad month in May, the EuroHedge Composite index
stands at 1.2% on a median basis so far this year and at
less than 1% on a mean average basis.
The provisional estimate for the InvestHedge Composite Index
shows a year-to-date median return of some 0.8% to the end of
May for all funds of funds and of just 0.3% for European
multi-strategy funds of funds.
Even with cash rates at effectively zero, these are hardly
returns to get investors excited and the performance
does little to convince those already sceptical about the value
that such intermediaries really add.
To be sure, this is not an easy investing environment. The
macro and market mood is jumpy to put it mildly with the
commodities rout in May and the escalating crisis over the
Greek debt restructuring in June being just the latest
outbreaks of extreme unease.
And it looks like being a nervy summer ahead with
fast-reviving fears of a full-blown Eurozone sovereign debt
crisis, the alarming prospect of a US debt crisis and the
biggest unknown of all in terms of the impact of the US ending
its QE stimulus programmes.
Deciding where to put your money, against such a febrile and
fearful backdrop, is made a good deal more difficult by the
knowledge that nobody either a hedge fund or a fund of
funds can afford a repeat of the problems that caused
such reputational damage in 2008.
After the crisis of 2008 and 2009, liquidity became the
mantra for investors most of all for the funds of funds.
So it is all the more ironic that the three core strategies
that investors identified as the most liquid, transparent and
safe places to invest long/short equity,
macro and managed futures are the only three that are
down for the year so far.
All other strategy areas have delivered positive returns
led, of course, by the very same strategies that
investors have turned away from on the grounds of illiquidity,
complexity or lack of transparency.
Convertible arbitrage which most investors have
abandoned altogether is out in front. Credit, again
mistrusted by many, is next. And third is emerging market debt,
a growing but still relatively small and very under-allocated
So this rather begs the question of whether the wrong
lessons have been learned since the crisis and whether
it is actually in the illiquid, non-transparent and complex
areas that hedge funds are best able to make money,
particularly in difficult markets.
One could go further. Did gating actually hurt investors,
for example as so many have moaned about? Or did it do
what it was supposed to do, which was to save them from their
own folly and stop them all baling out at exactly the wrong
And why should investors see hedge funds as liquid
investments? They dont do that with property or private
equity, for instance so why hedge funds? After all there
are plenty of other ways of getting liquid and cheap exposure
to markets and hedge fund-lite strategies through ETFs,
mutual funds, UCITS absolute return funds, index replicators
and the like.
So perhaps we are rediscovering some old truths about hedge
funds: that there is a premium for illiquidity, that what you
should be looking for and paying for is skilled investing
rather than cash management, and that hedge funds are probably
not the best place to put your money if your primary fixation
is whether you can get it back tomorrow.
It is an inescapable fact that the more liquid an investment
strategy is, or is required by its investors to be, the more
likely it is to be correlated to the underlying performance of
the markets in which it invests which, in the current
climate, is unlikely to be very compelling.
As the old adage goes: if you want liquidity, buy a
government bond assuming you can find a government these
days that is likely to be able to repay it.