Mon, Apr 21, 2014
A A A
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).”

Conclusion
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)

Source

kb

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Banner
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. Opalesque Exclusive: Classic Auto Funds Limited (CAF) launches several car investing funds[more]

    Bailey McCann, Opalesque New York: A new trend in alternative alternatives is emerging - car appreciation funds. Classic Auto Funds Limited (CAF) is the first to market with several funds that make super elite luxury cars into real asset investments. As a result of growing overseas demand couple

  2. Investing – Big hedge funds bought Puerto Rico's junk bonds, Fidelity explores new trading venue amid flash trade concerns, Crisis-era Greek bonds reward early buyers with big effective returns, Cargill unit discloses stake in Freddie preferred[more]

    Big hedge funds bought Puerto Rico's junk bonds From Reuters.com: Several large hedge funds doubled down on Puerto Rico in last month's giant bond sale despite the U.S. territory's financial struggles, the Wall Street Journal reported, citing confidential documents reviewed by the newspa

  3. Opalesque Exclusive: Hedge fund replicators evolve[more]

    Bailey McCann, Opalesque New York: Hedge fund replicators as a group of products tend to get a bad rap from hedge fund managers who suggest that the best a replicator can offer is dynamic beta capture. A

  4. Opalesque Exclusive: Pensions, endowments, family offices reconsider life settlement investments[more]

    Bailey McCann, Opalesque New York: Hedge funds were once the largest investors in the life settlement industry, now the industry is seeing more interest from pensions, endowments and family offices directly. Life settlements have always been considered a niche part of the investing landscape, an

  5. SEC allows investment funds to use social media[more]

    Bailey McCann, Opalesque New York: The Securities and Exchange Commission (SEC) has released new guidance letting investment funds and advisors use social media to promote client reviews. The guidance seeks to assist investment managers in developing compliance policies and procedures reasonably