Feature – Hedge funds
come, as it creates more opportunities to trade, more disper- sion and shorter timeframes for trades to work – meaning portfolios can be reloaded more frequently,” he says. But, he adds a warning: “On the other hand, increasing inter- est rates, steepening yield curves and tapering of quantitative easing (QE) programs could cause spreads to widen in credit. So less directional approaches are recommended.” Therefore, this opens up other hedge fund opportunity possi- bilities for investors. Boley sees convertible arbitrage, corpo- rate credit trading strategies, versus long biased ‘coupon col- lecting’ type strategies and multi-strategy relative value approaches as reliable areas to add risk.
“Over 2020 to 2022, and 2010 to 2013, fixed income relative value managers focused on micro dislocations in government bonds and related instruments found extreme quantitative eas- ing and low rates a challenging environment,” he says. However, he adds: “As rate volatility increased and quantitative tightening begins across geographies, we have seen real improvement in the trading environment, and this is reflected in performance year to date.”
Quant makes sense
There are other styles that could entice investors to make the hedge fund leap. “Diversified baskets of CTAs also make sense in the current environment,” Ghali says. “Quant strategies often make sense during periods of paradigm shifts as they remove the human element, and a basket removes some of the idiosyncratic manager risk and produces a more predictable, steady return stream.” In addition, Ghali argues that the current market environment should favour the active management style of hedge funds. “Active management seems to be better suited to the current conditions than passive investments,” he says, adding: “We would avoid higher net exposure to equity managers as well as credit managers as this point.” And Ghali notes the key component parts that should be cen- tral to investor thinking towards hedge funds: “Manager and strategy selection remain key.”
A bad year?
Although, from a performance perspective, hedge fund inves- tor sceptics could cite some poor results. The Barclay Hedge Fund index for the first half of 2022 reported average returns of -9.6%, with the average hedge fund down between 4% and 6%, for the year. Yet in comparison, a 60/40 portfolio has lost nearly 20%, year to date, the same as the S&P500’s decline in the opening six months of the year, which, like much else in the financial world at the moment, is the benchmark’s worst performance since 1970. Indices do not present a true picture, Ghali says.
44 | portfolio institutional | December-January 2023 | Issue 119
“It is somewhat facile to simply look at the overall index and determine that, based on this, hedge funds have not done well,” he says. “There are plenty of strategies other than equity long/short [which make up most of the index] that are doing well.
“The focus should be on alpha strategies and not hidden beta, which can be accessed more cheaply and with better liquidity elsewhere.” Ghali explains that in this context he has been avoiding higher net equity managers for quite some time. “A well curated port- folio of funds will be up in the mid-single digits this year, and some CTAs and macro managers have done a lot better than that. So, I do not agree with the notion that hedge funds have had a bad year.”
Stable portfolios On the contrary, hedge funds have played an important role in 2022, Ghali says. “Hedge funds have been providing much needed stability in portfolios this year,” he adds. Indeed, endowments, foundations and sovereign wealth funds have held their own this year, in part, due to holding a higher allocation to hedge funds compared to other institutional investors, according to Bfinance. Here the style of a hedge fund is important, which again returns to the all-important D word. “If you were invested in diversifying strategies, you have had a good year so far,” Ghali says. “The issue is that too many inves-
Amid increasing turbulence across financial markets, hedge funds are reasserting their value proposition among investors who crave capital preservation and
portfolio diversification. Tom Kehoe, Alternative Investment Management Association
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