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Past Year Review and Future Prospects

For hedge funds as a whole, 2009 was a year of recovery—77% of funds recouped the 2008 loss from the high water mark, according to Credit Suisse/Tremont data. It is the best return the industry posted in 10 years, says Oliver Schupp, president of Credit Suisse/Tremont Index LLC.

Strong overall returns made managed futures stand out as the under-performer, just as it had stood out as the over-performer in 2008, when all other strategies (except short-selling) were making the losses that the 2009 gains have now partly erased.

All databases show negative returns for managed futures in December and for the year, but the exact percentage varies across indexes (see Table 1). BarclayHedge reported the smallest loss, with a 0.1% average decline across commodity trading advisors.

Boris Arabadjiev, chief investment officer of Credit Suisse’s fund of funds business, says the bulk of the money in managed futures is in mid- and long-term trend following, which was difficult in 2009 because of sharp reversals in markets, but the two-year compounded return is testament to the benefit of having managed futures in a portfolio.
 

December was a bad month for futures strategies generally. With the US dollar reversing its decline and yield curves steepening, trend followers lost more on fixed income and currencies then they gained from equities and base metals, says a Credit Suisse/Tremont report. High-frequency managers made losses in the first half of the month on sharp intra-day reversals, while mean-reverting models were adversely affected by sharp market
reversals.

“Unexpected trend reversals in December erased much of November’s profits,” says Sol Waksman, president of BarclayHedge. “The sell-off in global fixed income futures, coming on the heels of November’s rally, caught many trend traders off balance and helped to set the stage for a down month.”

However, he found that discretionary and agricultural CTAs made profits. As for the year, he says no managed futures strategy gained or lost very much in 2009.

Global Macro

The end of 2009 was also tough for many global macro managers, although the strategy is positive for the year (Table 1). The December loss was driven by quantitative macro styles while discretionary funds had mixed returns and equity index trading was
generally profitable in both developed and emerging markets.

Performance for the year was robust but over-shadowed by big returns in a number of other strategies, notably convertibles (which recovered from a huge loss in 2008), emerging markets and fixed income arbitrage. One interesting aspect of global macro returns was their wide dispersion—the top manager made over 116%, the worst-performer lost more than 25%.

Looking to the immediate future, the Credit Suisse/Tremont report says the transitional environment may be good for macro strategies:
“As we enter the new year, uncertainty remains surrounding a number of public policy issues. We believe the range of potential outcomes, combined with a noticeable divergence across economies, should provide a robust opportunity set for global macro hedge funds as the market and economic transition continues.”

Mr. Arabadjiev adds another perspective. He argues that the macro environment has changed from 2008 and there are fewer prolonged trends across asset classes. He favors giving more weight to security selection strategies like equity long/short, and less weight to single directional strategies.

Tactical traders such as CTAs tend to under-perform on the way out of market dislocations and while there is still performance to be had from them, securities selection strategies are more interesting at present, he says.

From a long-term perspective, a comparison of strategies and markets from January 1994 through December 2009 reveals that global macro provided the highest annualized return during this 16-year period (Table 2). And it had the second-best risk-adjusted performance, after event-driven strategies, across hedge funds and major markets.
 

Source: Credit Suisse/Tremont 2009 Industry Review

Asset Flows
Capital inflows became positive in the third quarter of 2009 after the large outflows that started during the 2008 financial crisis. Credit Suisse/Tremont estimates that total industry assets grew to $1.5 trillion as of December, up from $1.3 trillion in June ’09—but still down substantially from a peak around $1.9 billion.

Much of the new money went to long/short equity funds. However, managed futures also was a net beneficiary of inflows. “Despite underwhelming performance for the year, the managed futures sector experienced an increase in new capital with net inflows of $3 billion in 2009 as long-term investors appeared primed to capitalize on returns driven by the bounce back in commodity markets,” says Credit Suisse/Tremont.

One trend that will likely continue is hedge fund managers’ interest in launching mutual funds, in particular using the European mutual fund format, UCITS III. Global macro and CTA strategies, due to their liquidity, are especially well adapted to the mutual fund structure.

For instance, London-based hedge fund firm Brevan Howard launched a UCITS III fund and reportedly plans to add others. See this issue’s Top Ten for Brevan Howard performance.