Editor’s Letter – Issue 113

April | May 2016

Originally published in the April | May 2016 issue

Some media coverage of hedge funds seems hyperbolic. Audiences could be forgiven for thinking that hedge funds are suffering substantial losses and seeing overwhelming outflows. A big picture view, based on balanced facts, contrasts with the isolated subsets of data that can be taken out of context, extrapolated from, and blown out of proportion, to concoct dramatic stories.

The generalised claim that ‘hedge funds are reeling’ does not seem consistent with aggregate performance for the year to April that is close to zero (some of the broad hedge fund indices are slightly positive and some are slightly negative). Hedge funds always display a wider dispersion of returns than traditional funds, because hedge funds are active managers rather than transparent or closet index-trackers. As many hedge funds run concentrated portfolios it is natural that the worst performers in any year can be 20% or 30% below the average with the best outperforming by a similar or larger margin. It is the outliers on the downside, including some activists and healthcare funds, which seem to receive disproportionate media attention. Funds up double digits for 2016 include certain CTAs, commodity funds, credit funds, and energy oriented funds, but they seem to get less media attention.

As well, many of those funds that have experienced double digit drawdowns in 2015 or 2014, have substantially outperformed the broad equity indices since their inceptions years ago. Different hedge fund strategies, and styles of fund management, follow varying cycles that ebb and flow with fashions and markets. Each strategy and sub-strategy should be assessed over its appropriate full cycle, which is a multi-year period that varies between strategies.

Stories about one or two pension funds exiting some hedge fund strategies also seem to get far more headline coverage than the many new allocations that are more often hidden in smaller news items. The big picture, as measured by The Deutsche Bank Alternatives survey, is that allocations to hedge funds increased in 2015: from 4% to 7% for European pension funds and from 8% to 10% for American funds. Don Steinbrugge’s Agecroft Partners hosted a ‘Gaining The Edge’ marketing summit that recently discussed the asset raising environment for hedge funds, and highlighted a number of large pension funds and other institutional allocators that are increasing their hedge fund allocations.

For example, Canadian public pension funds were examined as a case study of setting good examples at the CFA Annual Conference held in Montreal, Quebec. In response to paltry interest rates, Canada’s pension funds have maintained double digit allocations to alternatives, with hedge funds sitting next to real estate, private equity and infrastructure.

Even the claim that California’s CalPERS has exited hedge fund strategies is open to debate. The pension fund is allocated to direct lending strategies in Asia, and to an emerging markets activist manager who spoke at the SALT Las Vegas conference.