Hedge funds fell out of favor as the financial crisis unfolded in 2008. They were shunned due to high fees, lack of transparency and poor performance. In fact, an index fund tracking the MSCI AC World would have outperformed the HFRI Asset Weighted Composite Index by 3x over the last five years – while charging far lower fees (chart below).
In Asia, regulator-approved hedge funds are still small in number. In Singapore, for example, only 209 hedge funds are approved for accredited investors — roughly 5% of the total number of accredited funds.
Yet with the return of volatility after multiple years of market gains, hedge funds are getting a second look. Several wealth managers, including UBS Wealth Management, Citi Private Bank, Bank of Singapore and BNP Wealth Management have made a case for hedge funds, believing that the products provide diversification in a client’s portfolio, especially in an environment of increasing volatility and rising interest rates.
“In a very short time period in the first quarter, global equity markets and global high yield markets were down. But the hedge funds in our portfolio generally were up and that continues to be the case on a year-to-date basis,” Bradley Meyers, Chicago-based managing director for hedge fund strategies at GCM Grosvenor, said at a recent UBS Wealth client event in Hong Kong.
GCM Grosvenor is an alternative asset manager that invests money in hedge funds, private equity, real estate and infrastructure on behalf of institutional investors and family offices. Globally, it manages around $50bn in assets, according to its website.
Meyers, sharing the same view of UBS Wealth, believes that hedge funds are likely to outperform the broader equity and fixed income markets in the current market environment.
“Hedge funds historically have outperformed in periods of rising interest rates and in periods of rising volatility,” he said.
Year-to-date ending May, the HFRI Asset Weighted Composite Index returned 1.51%, versus MSCI AC World’s 0.37% and Bloomberg Barclays Global Aggregate’s -1.02%, according to FE data.
Some wealth managers do not share the same optimism about the alternative funds. Deutsche Wealth Management, for example, is not impressed with hedge fund performance in recent years.
Bank of Singapore suggests combining different hedge fund strategies. “Hedge funds are a huge universe, so you need a good asset manager to help select the best funds. You then get exposure to different strategies, but with the best hedge fund manager in each strategy,” James Cheo, the bank’s senior investment strategist, said previously.
Meyer said investors can make the most out of hedge funds by combining “all-weather strategies”, which promise to make money irrespective of how equity markets perform. For example, combining global macro and equity market neutral strategies.
He added that he mixes all-weather funds with tactical positions in sector- or regional-focused hedge fund strategies in which he finds opportunities.
One example is the US energy sector, where oil prices have gone up. “Oil prices went from below $30 per barrel to $65, however, there were several energy-focused equities that did not appreciate with that rally in the broader oil markets.
“We’ve identified select hedge fund managers who can identify companies having very strong management teams, high free cash flow generation and very high quality assets that you can buy at really cheap valuations.”
Each hedge fund style performs differently depending on the market environment, said Gunther Jost, Hong Kong-based head of hedge funds in Asia-Pacific for investment platforms and solutions at UBS Wealth, who spoke at an earlier media briefing.
For example, long-short equity hedge fund strategies may have the best performance during the period of 1992-2015. However, they also have the highest volatility and maximum drawdowns.
Source: UBS Wealth Management
Hedge funds have not performed well over the last five years