Hedge investors hunt for next blockbuster strategy
LONDON - Top hedge fund bosses will debate whether an upturn in distressed investing or profitable macro strategies offer 2008's blockbuster trade, just as short subprime was in 2007, when they meet in Monaco this week.
GAIM International 2008, held from June 17-19 in the Mediterranean resort for the super-rich, comes as the $2.6 trillion industry faces up to poor returns and investor outflows and searches for a follow-up to betting on falling subprime assets last year.
Such a strategy helped hedge fund manager John Paulson, who will deliver his views on the credit crisis to the conference, earn $3.7 billion in 2007, according to Alpha Magazine.
Global macro funds, which retuned 17.36 percent in 2007 and 5.19 percent in the first four months of 2008, according to Credit Suisse/Tremont, have been a popular choice with investors recently as other strategies have struggled.
However, not everyone is convinced such strategies, which bet on the likes of global equity markets, world currencies, sovereign debt and commodities and typically benefit from increased volatility, will continue to deliver.
"The market is saying go long macro, short event-driven. That was last year's trade," Francois Barthelemy, partner and fund manager at F&C Partners.
"Everyone is piling into macro and it's going to be a disaster. No-one knows where the dollar is going to go, where oil is going to go, where interest rates are going to go."
He prefers out-of-favor event-driven strategies, which bet on M&A (merger and acquisition) and other corporate activity, as he believes stocks are cheap and companies' boards are now more open to listening to shareholders.
Meanwhile, plenty of funds have been gearing up for a return of the distressed debt cycle, in anticipation of a pick-up in corporate defaults as economic conditions deteriorate.
"A lot of people are talking about distressed funds, but until we see the banking system work through its issues we don't believe credit markets will rebound significantly," said Christopher Peel, chief executive of BlackSquare Capital.
"Very difficult environment"
Over the first four months of 2008 the Credit Suisse/Tremont Hedge Fund index is down 1.45 percent, while investors pulled a net $5.9 billion out of U.S. hedge funds in April, according to TrimTabs Investment Research and BarclayHedge.
"Hedge funds are definitely going through a tough time currently. (But) there are many individual examples of managers who are also making a killing," said Amin Rajan, chief executive of independent fund management consultancy CREATE-Research.
Funds investing in equity markets have been affected by "two-tier" markets, as stocks more reliant on borrowing to fund growth have struggled while those linked to the red hot commodity sector have soared.
"This year has probably thrown up fewer opportunities, it's a narrower group of companies that is going up," Chris Palmer, head of global emerging markets at Gartmore, told the Reuters Investment Summit last week.
Meanwhile, banks' prime brokerage units, themselves under pressure from tighter credit conditions, have been cutting back lending to hedge funds, with little sign that this is easing.
"Prime brokers are managing their risks really tightly, it's still a very difficult environment. It doesn't seem to have gotten got any better, it's probably got a bit worse in some respects," said Odi Lahav, head of Moody's European Alternative Investment Group.
However, not everyone is struggling. A key speaker at GAIM will be Peter Clarke, chief executive of Man Group.
The hedge fund firm's flagship AHL managed futures strategy is up 28.6 percent over the past 12 months, helping Man Group's shares outperform the market by 22 percent so far this year.