Hedge fund investors take fundamentalist view

Relative-value and credit hedge funds are seen as better bets than CTAs and macro strategies. But Dr Doom lives up to his name.
Hedge fund investors take fundamentalist view

Credit, fixed income and relative-value strategies are seen as among the best bets in the coming year by funds of hedge funds in Asia, as global uncertainty continues to cast a pall on markets.

“The world is still in a very fragile state,” says Max Gottschalk, head of Asia at Gottex Fund Management, during a panel discussion at the Hedge Funds World Asia conference in Hong Kong this week.

Resulting market volatility has made some strategies more attractive than others, panellists note. Hedge funds that rely on fundamental analysis to pick stocks are viewed as having better prospects than directional hedge funds – such as global macro and commodities trading advisor (CTA) strategies – which are more vulnerable to market fluctuations.

David Bridge, a Singapore-based associate director at Pacific Alternative Asset Management, says his firm is “gravitating towards managers who are more fundamental … whether that be looking at pairs trading, relative [arbitrage] or within the fixed income space and relative value-type strategies”.

Relative-value funds, which aim to generate returns from mispricing between securities or other instruments that normally trade at similar values, have also been highlighted by Lyxor as offering promise amid this year’s turbulent markets.

Conversely, directional strategies such a global macro and commodities trading advisor (CTA) funds have greater exposure to market fluctuations, and thus are out of favour with some investors.

 “We've been less positive on macro strategies,” confirms Gottschalk, who notes that while these funds performed well in 2007-08 they're among the worst-performing strategies so far this year. "Macro performance comes from the direction of the markets.”

He adds Gottex has also been less positive on CTAs as computer models that select stocks are often thrown off when governments intervene in fiscal policy, influencing market movements in turn.

Several market rallies last year, for example, were sparked by speculation that central banks would act to stimulate growth.

Size also matters, note Gottschalk and Bridge, with large funds within the billion-dollar range typically underperforming mid-sized peers. “We tend to focus on emerging managers,” says Bridge, “those with less than $500 million in assets.”

Adds Gottschalk: “$50-500 million [in fund AUM] is the sweet spot here in Asia.”

Smaller funds are more nimble, with the ability to move in and out of portfolio positions more quickly than larger peers. However, the sector’s smallest funds running less than $50 million also tend to underperform, says Gottschalk. Managers tend to take riskier bets to generate high returns, which "doesn’t always work”.

While there was no consensus among the panel as to when market volatility might end, the conference’s keynote speaker, contrarian investor Marc Faber, takes the view that bear markets will prevail at least for the next couple of years.

“People talk about the fiscal cliff. I don't believe in a fiscal cliff, I believe in a fiscal Grand Canyon. There are going to be big [government] deficits for a long time,” says Faber, the self-described 'ultra-bearish' investor nicknamed Dr Doom.

“If you're very, very bearish about the world like I am, I think first [governments] will print money, then [the value] of money will go down,” he says. “And if everything fails, they blame someone and they go to war. Then the whole financial system will collapse and the world will have a systemic crisis.”

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