Some notes to the financial crisis and the position of Hedge Funds
The origins of the current financial crisis-have been repeatedly discussed by the media, investors, economists and financial analysts, pointing to a small number of factors as determinants: a lax lending policies by financial institutions, the refusal or inability of investors to assess the risks, and naive behavior with respect to a housing market that could not go up forever.
A long-term vision is essential when undertaking any alternative investment. We must remember that the absolute return concept has never been a synonym for “risk-free, or at least, should never have been. Despite the attacks of the anti brigade and a Hedge Fund press often not well informed about the mechanisms that move financial markets, one should step back and analyze the facts in perspective.
Those critics would refer to an article by Carol Loomis published in Fortune magazine under the title “Hard Times Come to the Hedge Funds.” In it the author stresses the losses suffered by hedge funds in a year when the stock market has also registered losses, condemning them to certain death. Additionally, the SEC claimed more regulation and oversight in the short selling by using, among other mechanisms, the uptick rule.
We should now add that the article was published in January 1970 and Loomis referred to the disappointing results last year. Then the story seems to be repeating thirty-eight years later with many of the same questions and controversies. Speaking of the director of the FSA on 22 October, Hector Sants gave an interesting reading of the role that hedge funds have played in the current crisis. Sants believes that, far from being in charge, the hedge funds have performed well relative to other financial assets. And for those traditional managers who publicly hailed the lynching of hedge funds and invites them to compare their own results with those in the ETFs, both for this year as in the previous five, and to return any commissions that are charged to give a results in large part, little or no added value to the investor.
We must admit that the behavior of certain hedge fund managers will not let outside criticism and the current storm, many will disappear. And we must not forget that the Hedge Funds are part of the system and while enjoying more flexibility and advantages, can not face the biggest wave of deleveraging in financial history. Those who can navigate through the storm will be in El Dorado: the risk premium return to be attractive, there will be fewer competitors and opportunities. At least one third of the industry will disappear. However, we should bear in mind that this contraction will be far from that suffered by the banking sector and yet, nobody seems to question the continuity of the latter.
Is the return of hedge funds so bad that they should be abandoned?
At the end of October the FoHF HFRI Composite was down -18.50% for the year compared with -38.26% MSCI World TR, a -35.95% MSCI Europe TR, a -32.84% S & P -1.48% TR and the U.S. ten-year bond. While it is true that this month is the worst record of the first in the last ten years, with a fall of -6.89%, no less so that, also from October 1998, the worst records in the other indices mentioned are of -18.93% -14.24% -16.80% and -7% respectively. On the other hand, if you look at the months in which different rates have been surprised to see negative returns is US10Y which shows a higher percentage of months in red, with a 51.24% while the HFRI reflecting improved reading with a 33.06%.
Conclude: the cornerstone of Hedge Funds continue to be, in our view, the asymmetry that offer from a risk return standpoint. While this asymmetry has accompanied some liquidity constraints that must be accepted. Contrary to popular belief, hedge funds are probably at the birth of a new era expansive in an environment of increasing opportunities that will return vital cornerstone role in portfolio management.
Moreover, it is true that not all survivors will benefit equally from the new environment, as we have learned to demand more: more transparency, more experience, more size, more and better risk control mechanisms, most proven quantitative methods and especially qualitative. The industry tends to focus on a few, in fact, a recent study by Morgan Stanley Bank now, reflected that the top 100 hedge funds worldwide had a market share of 69% at the end of last July compared to only 37% five years earlier, that effect will continue to benefit disproportionately larger in a turbulent environment in which the pursuit of premium quality, particularly in the flow of institutional clients.
The above criteria will be particularly important for managers of large hedge funds of funds, instruments latter grouping most of the investments in hedge funds in our country, because, increasingly, will require them great structures that ensure permanence in time while proven experience in previous crises.
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Tags: Current Financial, economists and financial, financial, financial analysts, Financial Crisis, Hedge Funds, investments