Hedge funds no longer the enemy
Investment losses and frozen redemptions in 2008 led many investors, including Australia’s superannuation funds, to exit their hedge fund investments.
But investment consultant InTech believes investors avoiding hedge funds might be throwing the baby out with the bathwater.
The outlook for hedge funds is now “the best in years”, with less capital competing for an “unusually wide range of opportunities”, according to InTech head of alternative investments Michael Coop.
Over the past two years US$300 billion has flowed out from hedge funds. The result has been a far less populated landscape, with the remaining players better positioned to take advantage of a marketplace adjusting to changing policy settings and fiscal stimuli.
Changes in interest rates and the unwinding of extreme leverage in companies — leading to refinancing, mergers, asset sales and even bankruptcies — represent opportunities for hedge funds.
Furthermore, hedge funds could do this with much lower levels of leverage to generate returns compared to the period from 2005-07, Coop said.
On price terms, hedge funds look relatively attractive when compared to share and credit markets, Coop said, while a risk of the factors that led to losses in 2008 is low.
Coop argued that hedge funds remain a “valid diversifier for portfolios dominated by shares and offer greater liquidity than unlisted assets” — while having delivered comparable investment returns to the latter during the crisis.
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