| Market-neutral strategies lose ground to emerging market funds |
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| 26/12/2006 | |
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Which hedge fund strategy has seen the highest level of redemptions? Since the start of 2005, hedge funds using market neutral strategies have experienced the largest and most volatile net redemptions while emerging market funds have held their ground, according to Lipper TASS and the European Central Bank (ECB). Meanwhile, the biggest net inflows this year have been into multi-strategy funds, managed futures, event driven and emerging market funds. For example, in the emerging markets category, exposure to Turkish fixed-income assets by dedicated emerging market economy funds increased from 5% to 6% of total assets from January 2006 to September of this year, while exposure to equity assets dropped from 3% to 2%. "The May/June correction triggered considerable net outflows from dedicated EME fixed income and EME equity funds, which peaked by the end of June 2006 at around 2% of total assets. Even in the case of Turkey, which was severely affected by the turbulence, there were subsequent signs of recovery (as the country's fixed-income assets) had already raised their exposures by July 2006 to levels surpassing those seen in January." Since the start of 2005, hedge funds using market neutral strategies have been experiencing relatively larger and more volatile net redemptions, although none of the strategies saw extreme redemption activity in the first half of 2006. Fund of hedge funds take heed "In addition to various hedge fund-specific factors and the general macro-financial environment, net flows into individual hedge funds can also be affected by idiosyncratic risk stemming from funds of hedge funds (FOHS)," warns the ECB. "These funds of funds resemble banks in that they perform a similar maturity transformation function when they offer their investors more favourable redemption terms than underlying single-manager funds." The redemption frequencies of FOHSs appear generally higher than those of single-manager hedge funds. "Thus, a mismanagement of funding liquidity risk related to higher redemptions caused by the departure of a key FOHF manager or a badly constructed and underperforming portfolio, could lead to forced withdrawals from underlying single-manager hedge funds," concludes the ECB. Although the market downturn in May/June had a significant impact on directional strategies, hedge fund returns were broadly positive by the end of September, with the exception of managed futures. Still, half of investors' capital remained committed to directional strategies, whereas the share of market-neutral (hedged) strategies has been ebbing since 2003. V.B |
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