Tired of these volatile and unpredictable markets? Fear not, we are — apparently — halfway through the deleveraging process.
Global wealth management company Bernstein has surveyed its hedge fund clients to produce a snapshot of where they stand. Or think they stand, at least.
For a start, average gross leverage has fallen to 142 per cent of assets under management from about 175 per cent in 2006 and 2007. Most respondents, 63 per cent, think the hedge fund deleveraging process is at least halfway over.
As for redemptions, we’re halfway through there too.
On average, those surveyed thought redemptions are 52 per cent complete — with the process to finish around the first-quarter of 2009. Still, about 10 per cent of respondents said they were setting aside cash for known or anticipated redemptions. Overall, cash as a percentage of total assets is now at about 31 per cent, compared to an average of 7 per cent over the past two years.
The subtext here seems to be that with redemptions coming to an end, cash in hand and what some see as a cheap market, a rally may be on the horizon. From Bernstein:
The magnitude and duration of hedge fund deleveraging, the amount of cash on the sidelines, and the potential buying power this represents for a market rally are among today’s key investment controversies.
There is, however, a not-so-subtle dig at the hedge fund industry itself and it’s ability to perform in rallies or otherwise:
One of the reasons that many institutions invest in hedge funds is to capitalize on their ability to short stocks, ostensibly giving them superior and uncorrelated returns. However, we find that hedge fund returns have not been particularly uncorrelated to the market (Exhibit 11). Over the past 10 years, long-short funds have shown performance that has 0.76 correlation with the performance of the S&P500. Similarly, shortbiased fund performance has a (0.83) correlation with the S&P500. In other words, these strategies are not providing substantial hedging. Equity market-neutral returns have only a 0.17 correlation with the overall market, including a substantial period of anti-correlation during the 2002 market correction.
No surprise then, with the S&P 500 down about 49 per cent this year, that investors pulled $40bn from hedge funds in the last month alone. Still, there’s a glimmer of optimism. From this morning’s FT:
Many investors in the industry argue that hedge fund performance – down 16 per cent this year, its worst yet – should improve as the amount of money in the industry drops.
Robin Bowie, chairman of Dexion Capital, which runs listed hedge funds, said hedge funds and private equity would be the best performing investments over the next three years. “The opportunity set has got multiple times better,” Mr Bowie said.
Hedge funds see $40bn in outflows – FT