Hedge strategies – that seek to reduce risk and dampen portfolio volatility when markets get choppy – have been among the most popular strategies among pan-European fund selectors since Last Word Research began its surveys in 2015.
In the Q2 Quarterly Asset Allocation survey, hedge: long/short equity funds was the second most liked asset class over pan-Europe, and hedge: multi-strategy third.
Hedge: long/short debt came at seventh across 26 asset classes.
Long/short equity hedge funds
Across the continent, 34% of fund selectors were looking to increase their hedge long/short equity funds, 32% to hold, 3% to decrease, and 31% did not use the asset class in Q2.
According to the survey, fund selectors from southern Europe like Italy, Spain, and Portugal particularly liked the asset class along with those from Switzerland, Germany, and France.
“The hedge funds that suffered a lot in the past weeks and months will outperform again and that’s why we are positive in the coming weeks on long/short equity.”
Source: Last Word Research
Looking at Morningstar fund flows data, in June 2018, all long/short equity funds – US, global, Europe, UK, emerging markets, and other – combined had inflows of €883m.
Despite this high popularity, according to FE Analytics, the hedge equity sector has lost 6.6% within the FCA Recognised universe and 6.7% with the Offshore Mutual universe over the three years to 31 July 2018.
Multi strategy hedge funds
For hedge: multi-strategy funds, selectors from Belgium, Sweden, France, Germany, Spain, and Switzerland are especially keen on the asset class.
Across pan-Europe, 23% were looking to increase their multi-strategy funds, 34% to hold, 5% to decrease, and 38% did not use the asset class.
Source: Last Word Research
While fund flows for multi-strategy funds have been the strongest out of the three historically, in June 2018, it was the first month since May 2009 in which the asset class experienced outflows (€1.2bn), according to Morningstar.
Long/short debt hedge funds
While long/short debt is the least popular out of the three, there have been plenty of buyers across Europe and few sellers, according to Last Word Research.
Italian, French, German, and Spanish fund selectors were the top net buyers.
Across pan-Europe, 24% were looking to increase the strategy, 25% to hold, 6% to decrease, 44% did not use the asset class.
Source: Last Word Research
However, Morningstar data found that May and June experienced outflows of €596m and €454m respectively. The last time the asset class experienced outflows was in November 2016 at €116m.
Where to invest
Paris-based Muria Asset Management head of fund selection, Thierry Guerillot, told Expert Investor that he was positive on all three hedge strategies – long/short debt, multi-strategy and particularly long/short equity.
“The hedge funds that suffered a lot in the past weeks and months will outperform again and that’s why we are positive in the coming weeks on long/short equity,” Guerillot said.
“We’re leaning towards emerging markets as investors are leaving those markets today without considering the securities, so we can probably find opportunities in emerging market equities and bonds.”
On emerging markets, the fund selector said he liked to be invested in companies in countries that had difficulties today and that were being sold by investors.
“So we’re probably looking at the Latin or even the Turkish markets right now,” he said.
“We need to have an opportunistic view on the market to profit from exhilaration and to be contrarian.”
Guerillot noted that European securities were expensive at the moment and that right now was too soon to reinvest into long/short European equities but it might be a good idea for the last quarter of the year.
Guerillot said he liked long/short equity DNCA Invest Miura I fund and long short market neutral risk premia fund Blackrock Style Advantage A2 Hedged.
“When we invest in alternative strategies we have in mind absolute return. So, we need to have consistency in delivering performance over a specific target. Clearly it is not the case today,” he said.
“We have a lot of deflection in the market and in alternative funds. With such cases of underperformance there will certainly be opportunities in the future to outperform.
“I don’t know when but there will because of the very negative and underperformance we see today.”
Over the three years to 31 July 2018 the DNCA Invest Miura fund has lost 6.7% compared to its benchmark which has lost 4.1%.
However, since inception (November 2009), the fund has returned almost on par with the hedge equity sector at 22.7% and 23.7% respectively.
Blackrock’s Style Advantage fund has also underperformed its mixed-strategy sector since its inception (June 2017).
The fund has lost 10.7% compared to the sector’s loss of 0.2% since June 2017.
Top performing hedge funds
Over the three years to 31 July 2018, the top five hedge funds were either multi-strategy or long/short equity funds.
Multi-strategy fund, Pimco GIS Stocks Plus Institutional Accumulation fund was the top performer over the same time period at 32.9%.
This was followed by long/short Pictet Mandarin fund at 32.1%, long/short GAM Star Alpha Technology fund at 25.8%, multi-strategy Nordea 1 Alpha 15 Multi-asset fund at 24.6%, and long/short Algebris Financial Equity I Accumulation fund at 23.7%.
The top hedge sector was fixed income for both the Offshore Mutual and FCA Recognised universes and underperformed at -1.5% and -4.6% respectively.
The sector that performed the worst for both universes was multi-strategy at -8.5% within the Offshore Mutual universe and -9.1% for the FCA Recognised universe.
The top funds were found using FE Analytics that were within either the FCA Recognised or Offshore Mutual universes domiciled in either Luxembourg or Ireland, and were available in at least three pan-European countries.