| Long-short indexes show widely different results |
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| 13/05/2007 | |
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If hedge fund observers are finding it difficult to measure the real returns of long/short strategies, it is not because they are myopic. Returns vary considerably depending on the source, and some industry professionals are raising questions as to what long/short actually means even as hedge funds continue to deploy the strategy. In the month of April, long/short strategies returned 2.74%, improving on its index-leading return of 1.76% in March, according to preliminary figures from Dow Jones Hedge Fund Indexes. This was the best performance of six hedge fund strategies net-of fees. But wait a minute! In April, the Hennessee long/short equity sub-index returned 1.85%. Why the difference and are these indexes accurate for your peer group analysis? Here is the long and short of it: one reason why there is a difference between the two is that the indexes measure different populations of funds. About 40 funds report to Dow Jones whereas the Hennessee indexes are drawn from a population of 1,000 (there are some that report to both). This begs another question: are Hennessee's figures more representative of the group? The answer may be more complicated than it is seems because the long/short universe is a broad one. In recent months, long/short trades have overlapped into event-driven deals. Big blur "There is a blurring of strategies and one has to be careful to not compare apples to buildings," says Robert Discolo, head of hedge fund strategies at AIG Global Investment Group with $8bn in hedge fund assets. About half of those assets are AIG's, while the balance consists of outside investors. "Much of this blurring has to do with hedge funds with long or event driven positions. There is not a lot of hedging going on. They are not long/short. They are long biased." One reason why those pursuing so-called long/short strategies are long biased is because shorting has been especially challenging of late. The Dow passed the 13,000 mark in April on the back of positive earnings reports and increased private equity financing. Yet investment sentiment for long/short strategies has not fallen out of favour. According to an Infovest sentiment survey, hedge funds in April remained positively disposed towards long/short strategies with 12% responding 'very positive' and 45% 'somewhat positive'. That compares to 8% 'very positive' for emerging markets. The highest marks went to activist investing, followed by energy, multi-strategy and merger-arbitrage. Those that garnered the least enthusiasm for the month were short-biased, statistical arbitrage, market neutral and managed futures strategies. VB |
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