Mixed outlook for hedge funds

Research group Lonsec is remaining relatively up-beat about the future prospects of hedge fund investments, despite what it identifies as looming challenges for the sector and the negative outlook held by many financial commentators.

In its annual review of the sector, released today, Lonsec says high investor demand for hedge funds could dampen the prospects for future returns.

“Many argue that with so much money (and so many funds) in the industry, what were once rife inefficiencies will become increasingly difficult to exploit,” Lonsec says.

“That is, with so many managers operating similar strategies, theory clearly suggests that greater market efficiency must result and thus exceptional returns will be harder to achieve.”

However, the research group says the sector is still valuable source of diversification for investors.

“Despite the somewhat ‘bearish’ outlook held by many financial commentators, Lonsec is still of the belief that, used appropriately, hedge funds can continue to provide diversification benefits for investors, as well as provide a potential source of either consistent positive returns or (as is the case with higher risk funds) above traditional asset class returns,” Lonsec says.

Of the 20 hedge funds assessed as part of the review, only one - AXA’s Diversified Hedge Fund - was downgraded to the research group’s lowest ‘redeem’ rating.

The move was prompted by “continued poor performance and a deterioration in Lonsec’s qualitative assessment of the manager”, the researcher group says.

The best performer over the year in absolute terms was MLC’s Platinum Global Fund - an international long/short equity fund.

The fund, which was ‘highly recommended’ by Lonsec, returned 34.9 per cent for the year to June.

Other top performers included the PM Capital Absolute Performance Fund, which returned 34 per cent and the Portfolio Partners High Growth Shares Trust, which returned 31.7 per cent.

HFA’s Conservative Investments Fund, which returned 4.6 per cent for the year to May, was a disappointing performer, Lonsec says.

“Of the hedge funds reviewed by Lonsec, performance was mixed,” the researcher says.

“Given the nature of the funds it was however pleasing that all produced a positive absolute return over the period.”