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
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