Hedge Fund Woes

Market views from today’s Hedge 2008 conference in London

I visited the Hedge 2008 Conference in London today. More on some of the views I heard in a few paragraphs, but first a look at hedge fund industry performance figures – which don’t make pleasant reading if you’re the average hedge fund manager or investor.

Here are the latest CS Tremont Hedge Fund Index returns – to end-September

A bleak picture indeed, with the average fund down nearly 10% year-to-date. And there are some surprising details in the table. How come short-selling funds were down 6% for September, a month when equities saw double-digit declines in most major markets? And only a 3.4% increase for the year-to-date, in one of the worst bear markets in history? Perhaps the managers have been thrown by the various short-selling bans introduced since the summer – that’s the charitable interpretation. Or maybe they weren’t doing their job and crept into long territory. If you had bought a bear hedge fund, you wouldn’t be too pleased – you could have bought an inverse ETF for a fraction of the cost.

And as the current flood of hedge fund redemptions is making clear, many investors have lost faith in this sector.

But whether you are a hedge fund fan, or whether you see them as “a compensation scheme disguised as an asset class”, hedge fund managers’ market views cover most asset classes from both a long and short perspective, and are of interest to ETF investors trying to work out their asset allocation.

And so to today’s conference.

Marc Faber, author of the renowned “Gloom Boom and Doom” report, stayed long-term bearish on the dollar and bullish on commodities, but said that for the next 3-6 months the dollar might continue its rally, and oil might hit $50 a barrel before starting the next leg of its bull market.

When compared to the 1930s, we are unlikely to see tariff barriers re-erected, said Faber, but the modern-day version of beggar-thy-neighbour policies – competitive currency devaluations – may cause similar international antagonisms.

And though commodities are still, in his view, the place to be, investors will need to pay a great deal of attention to the form of ownership – ensuring that their physical ownership rights are ensured, rather than relying on banks’ promises to pay a commodity-linked return, and assuming unnecessary counterparty risk.

The current economic situation – which Faber described as a war between the deleveraging private sector and a public sector seeking to spend its way out of recession – should continue to cause extreme market volatility. Faber said a rally to 1200 in the S&P; 500 is quite conceivable, even though the longer-term equity outlook is not good because earnings expectations are still too high.

Richard Werner, Professor of International Banking at Southampton University, gave a bleak assessment of the current government intervention programmes to bail out the banking sectors, arguing that similar fiscal stimulation packages didn’t work in Japan during the 1990s, and they are unlikely to do so now. Essentially, in his view, governments are injecting money with one hand and taking it away with the other, via new bond issuance programmes.

While one or two other conference participants were more optimistic, the general view seemed pretty gloomy, suggesting that investors will continue to hoard cash, and that there is no hurry to buy in most asset classes. The most bullish views expressed were Faber’s on commodities – and even there the buying opportunity may be a few months away.