Editor’s Letter – January | February 2014

Issue 92

Originally published in the issue

Performance reportedly of around 5000% for EXANTE’s Bitcoin hedge fund last year puts the Mediterranean island of Malta, the fund’s domicile, on the map. However, leaving aside the stratospheric world of quadruple-digit returns, the most common coverage of 2013 hedge fund performance laments that the average hedge fund lagged US equities last year. We would argue that US equities only make sense as a bogey for some hedge funds. Viz activist and event-driven funds that do actually have substantial net long exposure to the US equity market did outperform it last year, and often with smaller drawdowns.

Many hedge funds, however, have little or no exposure to any equities – let alone net long exposure to US equities. Relative value arbitrage remains the largest hedge fund strategy tracked by Ken Heinz’s HFR, and this strategy is rarely net long. On top of the well known, multi-trillion-dollar markets, hedge funds such as Man Group, cover feature for this issue, have pioneered the trading of less easily accessible markets: iron ore, coal, and electricity. These huge, multi-billion-size markets are driven by their own fundamentals and have no reason to move in lockstep with equities. Man Group’s Sandy Rattray tells us that some of his best 2013 trades included shorting coal and electricity.

In addition to viewing hedge funds through a wider lens of asset classes, a longer look-back period is helpful to assess hedge fund performance. HFR's indices stretch back as far as 1990, and have outperformed equities and bonds by multiples. Those with longer memories will also recall that many hedge funds made money during the 2001-2002 bear market. But when commentators do focus just on 2013, why not include credit and emerging market benchmarks? Investment-grade credit ended 2013 in negative territory, as did emerging markets equities and bonds. Manifold hedge funds that held steady while trading these assets fulfilled their minimum function of preserving capital – and some made money.

Unsurprisingly, hedge funds garnered healthy inflows in 2013 with overall assets reaching fresh highs of at least $2 trillion. In fact some headline figures for hedge fund assets are too low as they are omit regulated alternative products. Alternative UCITS assets hit $262 billion by the end of 2013, says Eurekahedge, and some observers think '40 Act fund assets have already passed $200 billion. Yet some databases freely admit that they are not yet tracking '40 Act funds, or not fully tracking UCITS funds! Overlooking these large pools of assets – which could well comprise between 10% and 20% of global hedge fund assets – could lead to spurious conclusions; their assets may be steadier than some databases suggest. For instance Barclayhedge, widely seen as having broader CTA coverage than other databases, suggests CTA assets are broadly stable. McKinsey projects that assets in retail alternatives could double over the next few years. This should surely throw down the gauntlet to database providers!