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Hedge Funds Pass High-Water Mark
FinAlternatives reports, Hedge Funds Pass High-Water Mark:
Hedge funds have finally recovered from losses they suffered during the financial crisis, according to the Barclay Hedge Fund Index.
The average hedge fund’s 3.63% gain in September at long last returns the average industry player to its high-water mark, BarclayHedge’s Sol Waksman said.
“September’s gain puts the index into new high ground. The prior peak was established at the end of October 2007 when the index gained 2.87%.”
“It’s taken three years for hedge funds to recover from the financial meltdown and break their previous high,” he said.
The BarclayHedge index is now up 5.26% on the year, buoyed by positive returns in 17 of its 18 strategy indices and “propelled by a robust rally in global equities, a boom in mergers and declining credit spreads,” Waksman explained. Some 90% of the hedge funds reporting to the BarclayHedge index were up in September.
Healthcare and biotechnology funds led the way last month, adding 6.35%. Equity long-bias funds also did well, rising 5.86%. Emerging markets funds were up 4.98% and global macro funds 3.65%.
With the Standard & Poor’s 500 Index an Dow Jones Industrial Average posting their best Septembers since the Great Depression, it was a long month for short sellers, who lost an average of 6.45% on the month.
The Barclay Fund of Funds Index returned 2.11% last month. It is up 1.25% on the year.
It's pretty much all about beta. Markets are up, credit spreads are tightening, and hedge funds are playing the Bernanke put. One risk officer at a fund of funds told me that most managers are having a hard time with their short books. "Any pickup in M&A activity can kill them, so they're reducing gross exposure".
Going into yearend, we"ll see if Foreclosure-Gate hurts hedge funds, the majority of whom remain long financial shares. But activity in the hedge fund industry is definitely picking up. Bloomberg reports that UBS, the largest Swiss bank, said it has been in talks with “dozens” of proprietary traders from firms worldwide who may start their own hedge funds as banks seek to comply with new U.S. rules aimed at curbing risk.
And in Asia, Chris Howells of ChannelNewsAsia.com reports that hedge funds are making a slow comeback in the region since many had suffered losses amid the financial crisis two years ago. We'll see how this all plays out, but hedge funds will play an important role in reflating risk assets.
Finally, I recommend you download and go through this presentation by Eric Chaney, Chief Economist at AXA Group. Eric's five key assessments:
1. Uncertainties may linger until China re-accelerates
2. This should happen in the next three months
3. €-area governments and ECB have ring-fenced debts
4. Yet, €-debt crisis aftershocks are possible
5. Fears of generalised deflation are overblownShort term conclusions: Risk aversion may remain high
There is a lot of food for thought in this presentation, and many hedge funds and asset managers are positioning their portfolios accordingly.
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"...With the Standard & Poor’s 500 Index and Dow Jones Industrial Average posting their best Septembers since the Great Depression..." Ummm. What is making my warm blood run a little cold over this sentence? Oh wait! Yeah- it was what then proceeded to occur after that Great Depression September. Tu Comprend history repeats itself?
Leo,
Your infatuation with financial oligarchy and 2/20 crooks is amazing-what in all of these for J6P?
It appears to be predicated on a belief that using public money to prop up the asset values of the wealthiest 1% is somehow supposed to be beneficial to the nation as a whole.
I'd love to hear someone talk about the people that QE and ZIRP are harming... gasoline up 20 cents the last two weeks alone, corn and beef flying, $3.5 trillion in the net value of savings destroyed by the 12% move in the dollar.
alright..."the government gives them all our money" but like Peter Gabriel sang "they don't know how to stop, nooooo they don't know how to stop." Sound about right?
Hmmm, and, how about that... SPY:
Opened Sept 1 at 105.31
Closed Sept 30 at 114.13
for a monthly gain of 8.4%, far outpacing the "average hedge fund" cited.
Comparing a 3.6% average return for hedge funds against a 10% return for an index in a given month is strange. Why would one do that? HEDGE funds, even if they on average have more beta than many people would want them to have, are still hedge funds and are supposed to be non-correlated to passive beta. This is especially the case in the extreme cases like last month (and one hopes they are equally uncorrelated to the downside, and would return -3.6% in months when the index would drop 8-10%).
Using the SPX as the benchmark is being generous. There is a tendency for many long / short hedge funds to focus more on the mid-cap names (long mid-cap and short big cap) so the Russell 2000 and the S&P 400 MidCap Index are probably more appropriate benchmarks. For the month of September:
Russell 2000 = +12.3%
S&P 400 = +11.1%
So the hedge funds are lagging even more hence the anecdotal evidence that they are reducing their short book = increasing net exposure. Hedge funds should have low net exposure (i.e exposure to the overall market) hence the word HEDGE. This move to reduce short positions is no different than market timing or performance chasing with a likely bad outcome when all is said and done.
Dear Leo,
I'M out of touch for this post. But anywway, I've been wondering, Leo, what would happen, according to you, to the canadian economy if the USA were to go throught an hyperinflation or a deflation crash? Tyler and ZH has been telling us to buy Gold, but what if... For the northern americans that we are?
Many thank's
http://bit.ly/dpr8ib
The report sheds some light on how Canadian exporters are positioning themselves, with the great strength in emerging markets like China and India, and the increasing challenge to get goods into the United States with the gridlock at border crossings.
Last year, the United States represented 63% of Canada's total merchandise trade (exports and imports combined), down from 65.7% in 2008 and 71.1% in 2005. Exports to the country were down nearly 30%, largely due to weak household demand as consumers paid down debt built up prior to the financial crisis.
More important, however, Statscan said that for the first time countries other than the United States accounted for a quarter of Canada's exports. This occurred even though exports to these countries declined 16.9% in 2009.
China replaced Japan as Canada's third largest country of destination, behind the United States and Britain. Exports to China, which have been growing for the past seven years, increased 6.6% in 2009 to $11.2-billion, fuelled by strong exports of canola, iron ores and coal. For the five-year period ended Dec. 31 of last year, exports to China have climbed 54.7%.
Has April come early this year or was this a serious article??
One risk officer at a fund of funds told me that most managers are having a hard time with their short books. "Any pickup in M&A activity can kill them, so they're reducing net exposure."
I believe you INCREASE your net exposure (longs minus shorts) or exposure to the overall market when a PM reduces his or her short book so a long/short fund is less hedged. Gross exposure (longs + shorts) is reduced by a decline in short positions.
Correct, my bad, editeds this...thank you.
Thanks for the uplifting article. Now I can sleep at night.
Oh, wait, these figures are for the hedge funds that are left standing.
How 'bout a list of the ones which have disappeared into the fog of losses?
Good catch, RR.
Survivorship bias. Just like how people select funds to invest in, and assume that the ones showing the best percentages are 'it'. Nothing to indicate whether those funds made it that far due to sheer luck.
And of course, always ignoring the failures.
Best Buy doing a little better these days? Maybe picking up the left over Circuit City customers. Funny how that works.
Survivalist bias, perfect.
As we approach full employment and manufacturing utilization these funds are indicative of the real health of our economy.. A real gauge of things..
Ohh wait...never mind..