All aboard! The hedge fund express is about to take off — or is it about plunge downhill? It’s actually been moving in both directions, fairly unpredictably for most of the year.
The roller coaster ride in August was indicative of how hedge funds have performed for most of 2010, said Anthony Lawler, head of portfolio management at Man Investments, one of the world’s largest listed hedge fund providers.
“I think August was a challenging month,” Lawler said in an interview. “Indices like the S&P [500] and MSCI were down 6%.”
“But we had some diversified products that were up 1% and 1.5%.”
It’s positive news for hedge fund investors and managers, especially since the common perception among the general public is that hedge funds are risky and dangerous, Lawler said.
“We very much live by the ‘first, do no harm’ mantra.”
Hedge fund managers had a tendency to dial down the risk in the face of a bear market in August, making prudent decisions and demonstrating successful risk-management strategies.
In July, managers embraced risk as optimism grew in world markets — and in the previous months of May and June, investor indecision created a turbulent climate.
The past few months have forced managers to reduce risk, in an effort to protect against any losses.
Lawler said for the most part, while hedge funds have produced rather flat results, they have also avoided any major dips.
“We intend to not lose money for our clients, so being slightly up 1%, we take as a minor victory in this sort of environment.”
Hedge funds may have lost a key battle through their marked decline during the financial crisis, but Lawler insists they have not lost the war.
“It’s very portfolio enhancing to add a well-managed set of hedge funds. Statistically, that is true.”
But there are wide variations throughout the industry.
“August’s slightly positive overall returns are slightly misleading. Hedge fund returns are actually widely dispersed. Some funds of funds were up over 1% for August, while equity biased funds were negative.”
A diversified mix and full transparency, where managers can actively control some of the risks, are key aspects to maintaining the health of hedge funds, Lawler added.
Managed futures firms were the top performing hedge funds in August, as they benefited from the strong rally in U.S. Treasuries and other government bonds. Managed futures tend to perform well even when equities don’t, Lawler said.
Global macro and relative value strategies also did well. Global macro traders profited from currency, fixed income and commodity trading, while relative value traders reaped rewards from credit and derivative arbitrage strategies.
Equities were weak in August, but equity hedged managers had fewer losses than the overall equity market.