Most Popular Hedge Fund Strategy is Relative Value

Assets under management for hedge funds using the relative value strategy have surpassed the equity long/short strategy for the first time in the fourth quarter of 2012.  As of September 30, both strategies had a market share of 26.7% of the $2.192 trillion hedge fund industry.  The next most popular strategies were event driven at 24.5% and macro at 22.1%.  To give you a sense of where equity long/short was coming from, it was 56.3% of all assets under management for hedge funds in 2000.  Several factors accounted for the shift:

• Investors reducing their exposure to equities to diversify and reduce their portfolios' volatility
• Investors investing directly into hedge funds and away from fund of hedge funds, which are heavily weighted towards equity strategies
• Underperformance of equity long/short strategy over the past five years

Year	HFRI Equity Index	HFRI Relative Value Index
2008	(26.65)%	(18.04)%
2009	24.57%	25.81%
2010	10.45%	11.43%
2011	(8.38)%	0.15%
2012	7.39%	10.04%

Funds that have experienced significant inflows include BlueMountain Capital Management, Pine River Capital Management, Marathon Asset Management, MKP Capital Management and Brigade Capital Management.

However, for 2013, several investors are reviewing the value proposition of equity long/short funds.  Fixed income returns are projected to be low and stockpickers will be in vogue again as macroeconomic moves such as Quantitative Easing 3 fade.

The source for this article can be accessed here.

A To Do List for Funds of Hedge Funds

In prior articles, I have noted that funds of hedge funds (FoHFs) are losing assets under management even as the assets of hedge funds have bounced to above pre-crisis levels.  The percentage of assets invested through FoHFs had fallen to 34% in 2010.  The SEI Knowledge Partnership conducted a survey of 220 institutional investors, investment consultants and FoHF managers in June 2012.  The main complaints of investors were the underperformance of FoHFs over the past three years, high fees, lack of transparency and portfolios that are correlated with other asset classes.

The research paper listed seven topics for FoHFs to address:

• Customization of reporting, portfolios (the underlying managers of a FoHF), transparency and liquidity to create complete investor solutions
• Investing in and seeding emerging managers
• Improved risk management during market collapses
• Overdiversification.  Investors are now interested in a "best ideas" portfolio.
• Creating account structures to handle investors' requirements such as separate managed accounts, derivatives, quantitative products and registered products (UCITS and mutual funds)
• Using their subject matter expertise to advise investors on manager selection, portfolio construction, asset allocation and special strategies
• Aligning the fee structure with the investor's interests such as raising the hurdle rate or charging a flat fee

To read the entire paper, the report may be accessed here.