Funds of hedge funds look to global macro for gains
Tue Jul 22, 2008 2:29pm BST
By Nigel Davies

LONDON (Reuters) - Funds of hedge fund managers are looking to global
macro funds to try and steer clear of the mess thrown up by the
credit crisis while cautiously dipping their toes in a small pool of
more risky assets, a Reuters poll found.

Stormy markets have torn through the hedge fund market this year,
forcing many to shut up shop and others to tumble, but most have
still managed to keep well ahead of the severe double digit losses
suffered by global stock markets in the first half of the year.

The quarterly survey of 13 managers which invest in a basket of hedge
funds and manage a total of around $150 billion in assets showed
global macro funds leading the way through 2008 as they tend to
benefit from periods of high volatility.

Typically such funds bet on the direction of markets, currencies or
debt, and commodities.

"We have all been complaining for three plus years about the lack of
risk premia everywhere and the lack of volatility. Well, be careful
for what you wish for," said Mike Hennessy, managing director of
investment at Morgan Creek Capital Management in North Carolina.

Just two strategies, global macro and multi-strategy arbitrage, were
forecast to provide above average returns in the second half of 2008,
roughly in line with the April poll, but down on the five strategies
predicted to excel back in January.

Indeed, turbulent markets have proved a double-edged sword for hedge
funds this year. Hedge Fund Research reported that 170 funds
liquidated in the first three months of the year, up from 138 funds
that closed in the same period last year.

But losses have not been as bad as many perceive. HFR's fund of funds
composite index fell 2.54 percent to the end of June, some way off
the 13.8 percent the MSCI World Index fell in that period.

Managers in the survey said investment diversification, being short
financials -- betting they will fall further -- and any allocations
to energy-related sectors had helped portfolios this year. They have
also held high levels of cash.

Oil prices rose from around $115 a barrel at the time of April's
survey to rally over $147 in July. They have since fallen back
sharply to around $130 a barrel.

The credit crisis has been a bruising experience for hedge funds, and
for many banks -- shares of Swiss financial heavyweight UBS have
plummeted 53 percent so far this year. But the crunch has also
offered up investment ideas.

"The greatest financial crisis in our lifetime has created excellent
opportunities for the next one to five years," said Hennessy,
highlighting senior bank loans, certain structured debt and
distressed debt as areas to consider.

EMERGING SINKING

Indeed, the survey showed that managers increased their allocations
to distressed debt slightly over the last quarter.

Such strategies offer increasing investment opportunities as
corporate defaults rise.

In contrast, managers are growing more wary of emerging markets
strategies to which they have reduced their allocations and forecast
no relief in the coming two quarters.

This was only the second survey since the poll started in 2004 where
emerging markets were estimated to post below average returns.

"We are in a time where we need to protect capital than take big
risks. If we invest now it would be like catching a falling knife,"
said Christophe Chrun, fund manager at Dexia Asset Management in
Paris.

That would appear a wise move as the HFR Emerging Markets Index fell
close to 7.0 percent in the first six months of the year, making it
one of the worst performing hedge fund strategies, but still above
the MSCI Emerging Markets index which lost around 13 percent in that
time.


© Thomson Reuters 2008. All rights reserved. Users may download and
print extracts of content from this website for their own personal
and non-commercial use only. Republication or redistribution of
Thomson Reuters content, including by framing or similar means, is
expressly prohibited without the prior written consent of Thomson
Reuters. Thomson Reuters and its logo are registered trademarks or
trademarks of the Thomson Reuters group of companies around the world.