UBS: Why we are still fond of funds
We’ve said before that hedge funds, because they are actively managed and target asymmetric returns, are unique diversifiers/stabilizers in a portfolio. This was also the case in the most recent market correction.13.11.2015 | 10:08 Uhr
Hedge funds started the fourth quarter on a strong footing, partially recouping some of the lossesrecorded during the summer.
- The HFRI Fund Weighted Index: +1.7% in October, making year-to-date (YTD) performance just aboutflat.
- Equity-hedge managers: + 3.16% on the month(+0.65% YTD)
- Event-driven: +1.72% (–1.41% YTD); CIO-preferred strategies merger arbitrage and special situationsare up 1.33% (+2.56% YTD) and 2.42% (–1.91% YTD), respectively.
- Relative-value strategies: +1.75% (+1.76% YTD).
- Macro managers underperformed: –0.51% on the month and –1.54% for the year.
October’s performance can be mainly attributed to the sharp rebound in global financial markets, particularly in risky assets, thanks to healthy economic data and supportive central bank action. However, compared to other asset classes (e.g. equities) hedge funds only partially captured the strong market rally, suggesting that, on average, managers are still running low net exposures and are generally defensively positioned. This in combination with this year’s flat performance has led to renewed discussion among investors about the role of hedge funds within a multi-assetclass portfolio.
In our view, comparing long-only equity performance to broad hedge fund performance on an absolutebasis is misleading. Many hedge fund strategies have no, or only limited, exposure to equities. Also, in terms of volatility, hedge funds are more like bonds than equities. Importantly, investors often forget that the true value of a hedge fund within an asset allocation emerges in times when markets are less predictable and certain. From May to September, a broad hedge fund index declined by about 5% while global equities lost about 10% and US high yield bonds lost about 6.5%.
In future, returns should become increasingly difficult to generate and volatility should also increase slightly, making active risk management ever more crucial. Investors should therefore keep a portion of their portfolio active to serve as a hedge against downside risks which long-only investment instruments cannot provide on their own. However, not all hedge fund strategies are alike, and any individual strategy could underperform in a particular period. For this reason, a hedge fund portfolio diversified across various managers and strategies is the best way to achieve stability.