Editor’s Letter – April/May 2013

Issue 85

Originally published in the April/May 2013 issue

It usually takes time to attract enough capital to become one of Europe’s largest 50 alternative asset managers, so it is not surprising that our performance winners are mostly familiar names with firm histories of five or 10 years or more. However in several cases newer funds launched by the giants of the industry have won the awards, which shows how innovation continues to drive performance even inside the biggest firms. One example of a newcomer fund is Chenavari’s European Regulatory Capital Strategy (Chenavari Credit Fund – D1 Share Class), which started investing in 2011 and made 36% last year from investments that help banks meet the capital requirements set by national and supranational regulators. Another fund making new departures is Man’s AHL Evolution, which advanced by 23.6% last year, partly by extending Man Group’s tried and tested models to a wider investment universe, including volatility, credit and electricity-related instruments. Its 2008 start date makes Evolution one of Man Group’s newer CTAs.

In long/short equity, however, both winning funds had track records stretching back 10 years or more. Brummer’s Zenit was one of Europe’s first long/short equity funds in 1996, and last year it delivered 13%, almost entirely from alpha with very little equity beta exposure. Henderson’s AlphaGen Volantis Fund maintained its momentum with a 12.7% return, and, although this small cap fund is hard closed, a new vehicle specialising in microcaps will soon be unveiled. Our credit fund winners both participated in continuing spread tightening, while avoiding or limiting their downside during the second quarter correction. Bluebay’s Credit Alpha Long Short Fund produced a 26.21% return in 2012, while Cheyne’s Long/Short Credit Fund made 26.8%. Both of these funds achieved the returns mainly from trading investment-grade credit, and both of them identified interesting relative value and alpha opportunities as correlations between credits dropped in 2012.

In macro trading, emerging market specialists Pharo posted a 12.53% return very close to their long-run average annual number since 2005. The manager was both long and short of many currencies at different times of the year and expects continuing divergence within the emerging markets arena to throw up plenty of trading opportunities. Brevan Howard’s Emerging Markets Strategies Fund made 14.08%, mainly from selectively owning liquid emerging market fixed income bonds that matched the manager’s macro views and fundamental analysis. Against a challenging backdrop for discretionary commodity traders, Brevan Howard’s Commodities Strategies Fund appreciated 5.87% by focusing on a few highest conviction trades including spreads between US and European oil markets. This fund is unique in the Brevan stable in that it almost exclusively uses options. Event driven was also a treacherous path for many funds that were wrong-footed by merger deal breaks. Tony Chedraoui’s Tyrus Capital Opportunities Fund, however, generated a 6.8% return even while maintaining cautiously low exposure. Tyrus Capital trades a broad range of corporate events and applies investment banking techniques to event analysis.

In systematic macro trading, Harmonic’s Alpha Plus Global Currency Fund had one of its best years since 2008, profiting by 25.41% partly from growing dispersion within the emerging markets currency space, as well as from G10 developed currency trades. Aquila Capital’s AC Risk Parity 12 Fund made 9.85% by rebalancing weightings of bonds, equity indices and commodities according to sophisticated risk management systems. Asset allocation decisions also form an important part of Philippe Jabre’s JABCAP Global Balanced Fund, which has rotated from a defensive cash weighting in 2008, to corporate credit in 2009 and now emphasises equities. Japanese equities in particular helped the fund to power ahead by 15.5% last year. Crispin Odey’s European equity long/short strategy has been running for nearly 20 years and continues to generate strong performance from high conviction stock-picking, with Odey European Fund Inc. returning 30.69% in 2012.

Going forward into 2013, some of these funds seem to be sticking to their 2012 strategy while others have repositioned – Brevan Howard’s Emerging Markets Strategies Fund, for instance, has made a “great rotation” from bonds to equities. All of these funds are excited about the opportunity set for their strategies, and The Hedge Fund Journal is willing to wager that some of them will re-appear in next year's line-up.

Rod Sparks