The outperformance has been broad-based across most hedge fund strategies. Commodity hedge funds have capitalised on much higher commodity prices over the last few months and have recorded strong returns. Equity long strategies have delivered good results. Real estate focused funds have seen positive returns. Convertible arbitrage, one of the worst performing hedge fund strategies in 2008 with a loss of more than 30 per cent, has rebounded strongly this year with a rise of 10 per cent.
As with the Gulf, emerging markets have performed very well, with emerging market hedge funds rising by eight per cent last month. The Asia-Pacific region achieved good returns, aided by the more positive outlook for China and hence the wider region. On a global basis, the one area of subdued performance was Europe where growth prospects remain weak.
Most major hedge fund indices have outperformed conventional indexes over the past couple of months and the trend looks likely to continue. The year-to-date performance has been superior to that of the broad equity market. Most hedge fund indices are up by more than nine per cent for the year while the MSCI World Index and the S&P 500 are up by six per cent and two per cent respectively. About 75 per cent of hedge funds are positive for the year to date.
Although hedge funds have come under the spotlight and been heavily criticised for some high-profile failures and scandals, hedge funds are only down by about 12 per cent from their peak in late 2007. Despite the recovery over the past few months, most stock markets are still down by 30 per cent from their 2007 high.
May was a particularly strong month for hedge funds, with the Eurekahedge Hedge Fund Index rising by 5.4 per cent, its highest monthly return in a decade. Hedge funds also experienced net inflows in May, the first net inflow of money for 10 months. Gross inflows amounted to more than $19 billion (Dh69.7bn) with redemptions of $8bn. The pace of withdrawals is also slowing down. There are also signs that the level of leverage has bottomed out.
According to a survey from Bank of America Securities – Merrill Lynch, the weighted leverage of hedge funds increased to 1.03 in June 2009 from 0.82 in December 2008. In August 2006, the weighted leverage was at a high of 2.4. Bank of America data also indicates that hedge fund net exposure increased to 35 per cent in June from 25 per cent in May, having had limited involvement in markets up to April. May and June could prove to be the turning point for alternative assets as they enter a positive performance trend period.
Lower competition in the market is providing an opportunity for hedge funds. Bank proprietary desks have reduced trading significantly and funds have reduced their leverage. This means there is less capital chasing very attractively priced assets.
Hedge funds are likely to continue to see net investment inflow over the remainder of the year as investors look to exploit low-priced asset and gain higher returns. Returns for the second half of the year should continue to outpace those of conventional assets.
- The author is a US-based commentator on business issues
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