Hedge funds have been enjoying an uptick in interest in recent weeks with wealth managers starting to raise allocations.
Asset allocators often cite the lack of transparency as a big reason not to invest their clients’ money in hedge funds but recent developments will put that position to the test with a much stronger case to invest building.
As reported by this website last month, Investec Wealth & Investment is one major wealth firm already shifting money in this way. It recently raised its allocation to alternatives by 2%, or £500m, with much of this going into hedge funds.
Liontrust is another firm which is making this move, as reported in this month’s Portfolio Adviser magazine. Head of multi-asset John Husselbee said adding hedge funds allowed him to cut long duration bond exposure while retaining some of the low correlation, defensive aspects bonds bring to portfolios.
There are three different but closely related factors combining in favour of the asset class now, which collectively allow a persuasive argument to be made by advocates of hedge funds.
Firstly you have recent performance, particularly in the case of macro hedge funds. Hedge funds classified as having a ‘global macro’ strategy are up 3.4% for 2015 so far, as measured by the HFRX Macro/CTA index. Pretty much any investor’s eyes will light up at the prospect of making over 3% in three months.
While the ubiquitous ‘past performance is not a guide to future returns’ is just as applicable to hedge funds as any other investment, it is also the case that just as good recent performance brings more interest to standard long-only funds, so it will be the case for hedge funds.
“The first quarter’s market conditions have been supportive of hedge fund performance, posting solid gains while the S&P 500 index is down year-to-date,” said Philippe Ferreira, a research head at Lyxor Asset Management. “Looking back at the quarter, there are many positive points worth highlighting, following a lacklustre 2014. Once again monetary policies took the front seat, driving hedge fund returns,” he added.
Then, more importantly there is the fact that conditions which allowed for performance are likely to persist for some time to come, namely interest rate uncertanty and monetray policy divergence between different parts of the world.
“Heading into Q2, we are confident that hedge funds will benefit from a more fragmented environment, after highly macro-driven markets in Q1,” Ferreira noted.
The third factor in this triple whammy is there is a lot of money still invested in long-only bond funds which needs a new home with the asset class looking increasingly like it is in a bubble waiting to be popped by interest rate rises. Hedge funds, along with absolute return funds could mop up much of this money as investors seek a bigger toolkit, and certainly one that contains the ability to go short on bonds.
As with any asset allocation trend, those who spot it earliest and act on it first will see greater rewards than those who wait for a bandwagon to be rolling.
