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 vu.
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
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
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
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
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
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
Then again, if the risk rally keeps going....