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
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.
|Hedge Fund Index
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
“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.
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.
|TABLE 2 Selected Indexes, January 1994 -
|Hedge Fund Index
|Barclays Global Aggregate
|MSCI Emerging Markets
Source: Credit Suisse/Tremont 2009 Industry Review
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
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
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