Tue, Oct 25, 2016
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Directional hedge fund strategies were out-performers in 2010 - Hennessee Group

Tuesday, January 25, 2011
Opalesque Industry Update - Hennessee Group LLC, an adviser to hedge fund investors, found in a brief study that directional hedge fund strategies were the primary drivers of portfolio performance in 2010, most notably event driven, distressed and emerging markets (ranking one, two and three, respectively among the Hennessee Hedge Fund Indices). The underweighting of these strategies in a hedge fund portfolio likely resulted in underperformance against major hedge fund indices.

Charles Gradante, Co-Founder of the Hennessee Group stated, “2010 was a tough year for non-directional hedge funds. The market rally that commenced in early 2009 and continued through the end of 2010 benefited those strategies with elevated levels of exposure to the financial markets as they were able to benefit from the beta tailwind across most asset classes.” Gradante added, “At the multi-manager level, portfolios that lacked exposure to directional strategies struggled to keep up with the broader Hennessee Hedge Fund Index. That said, investors should be aware that while directional strategies may offer greater upside potential, they also come with greater downside risk.”

Characteristics of Directional Strategies
Directional strategies such as event driven, distressed and emerging markets strategies tend to be more long biased to the markets and utilize less hedging. Heightened exposure levels to the markets leads to higher correlation to the broader markets and more systematic (beta) risk. Increased directional risk allowed them to perform well on a relative basis during the recent market rallies in 2009 and 2010 as most asset classes experienced broad based gains.

Gradante added, “a major challenge for many funds during the recent equity market rally has been the increased correlation and lack of dispersion among individual securities. In 2010, shorting was particularly challenging and served as a significant detractor for many funds in 2010.” Gradante continued, “However, such an environment proved beneficial for funds with increased market exposures as their hedges did not serve as much of a drag on performance as it did for more market neutral funds and other strategies with significant hedges.” (See white paper: Hedge Funds Struggle with New Market Order).

Higher Reward Can Lead to Higher Risk
Directional strategies can offer greater return upside, however this generally leads to greater risk to the downside. As can be seen in the below chart, all three strategies have outperformed the broadly diversified Hennessee Hedge Fund Index over the most recent 10 year period, but have assumed more volatility, particularly the Hennessee Emerging Markets Index. Gradante added, “The 2008 market correction illustrates the risks inherent in more directional strategies.” Gradante continued, “The Emerging Markets Index sold off -30.47% (ranked 23rd), the Distressed Index fell -29.27% (ranked 22nd) and the Event Driven Index dropped off -24.72% (ranked 19th).”

While the Hennessee Group believes there is a place for more directional strategies within a well diversified hedge fund portfolio, it is important that investors are aware of both the upside, as witnessed during the most recent market rally, but also the downside risks. Charles Gradante concluded, “A directional strategy is most appropriate for investors willing to take some risk in exchange for potentially higher returns. That said, we believe these strategies should be sized appropriately and combined with a mix of non-directional strategies that can offset some of the downside risk during times of market distress.”

(press release)



What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. M&A - U.S. hedge fund HarbourVest is shock winner in the £1.1bn SVG Capital takeover saga, Hedge fund Parvus shows hand, toppling William Hill merger deal[more]

    U.S. hedge fund HarbourVest is shock winner in the £1.1bn SVG Capital takeover saga From Thisismoney.co.uk: The fierce battle to buy Britain's biggest private equity group has come to an unexpected conclusion, with the original bidder walking away with the prize. SVG Capital has agreed

  2. Marc Lasry: Energy is still a phenomenal opportunity[more]

    From CNBC.com: Distressed debt specialist Marc Lasry said energy debt is still a "phenomenal opportunity" because investors can get "massively overpaid" for the risk they take on. There are "huge opportunities" in the energy sector especially in restructurings, the Avenue Capital Group CEO said Tues

  3. Opalesque Exclusive: Ex-SAC manager re-emerges with market neutral hedge fund[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: A manager re-emerged from the SAC battleground last year to launch his own hedge fund under the umbrella of New York-based investment firm Endicott Group.

  4. North America - Hedge-fund manager Kyle Bass says the U.S. is on track for stagflation, Billionaire hedge fund titans Dinan, Lasry on election, markets and best investment ideas[more]

    Hedge-fund manager Kyle Bass says the U.S. is on track for stagflation From Marketwatch.com: Kyle Bass, founder of Hayman Capital Management, on Wednesday warned that the U.S. is headed toward so-called stagflation. Stagflation is typically described as persistently high inflation and hi

  5. David Einhorn speaks on passive investing, Mylan, his cheapest stock, the Fed[more]

    From Forbes.com: Greenlight Capital hedge fund manager David Einhorn (Trades, Portfolio) joined nine other famed investors on Tuesday to talk about stocks at the annual Great Investors’ Best Ideas Investment Symposium in Dallas. Presenters at the annual conference typically pitch one or severa