| Hedge Fund Observer: hedge fund performance tied to cyclical factors |
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| 04/09/2005 | |
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They may not be so "absolute", after all. Hedge funds have to deal with cyclical factors, as for any other traditional investment funds. That's one of the main finding of a survey of major hedge fund industry players by the Edhec-Risk Advisory, the hedge fund consultancy of the Edhec business school. 70% of the respondents consider that cyclical factors were among the main reasons behind recent lower-than-expected returns. And for 42% of them, cyclical factors were the only reason. That was not exactly the average alternative manager's stance a few years ago, when hedge funds were said to deliver performance in any circumstances thanks to their decorrelation property. "The idea that hedge funds are not absolute return funds seems difficult for the industry even though the risk factors (betas) and the prevailing variations in the premiums that are attached to these (cyclical factors) are increasingly gaining acceptance", stated the Edhec-Risk in a release. Other finding: 70% of the schemes are aware of hedge funds' exposure to alternative betas as a source of return. Stoicism Hedge fund managers remain stoic in face of the problems that have afflicted their industry since the beginning of the year. For instance, the S&P 500 once again outperformed the Hennessee Hedge Fund Index in July, with a 3.72% performance against 2.95%. Yet, according to major industry players, the future of the industry seems rather good. Most of them believe that its capacity should keep pace with continuing money inflows from investors undeterred by relatively low performance and a scandal-ridden industry. According to most of the respondents to the survey (65%), the industry assets will continue to grow at annual rate of 10% over the next five years. That should cause some stress on the industry, as arbitrage opportunities – one of the hedge fund's industry's main source of returns - are likely to be more difficult to find due to capacity constraints. However, respondents believe that not all strategies will be affected equally, since arbitrage-intensive strategies will be the first to face those constraints. The "critical size" of a hedge fund is also thought to be highly dependent on the underlying strategies for 23% of the respondents. For 18% the size is around $500 million and for 22% the critical size is between $1 billion and $2 billion. J.L. |
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