1. FINANCIAL TIMES MONDAY JANUARY 4 2010 7
FTfm
Refining risk could mean healthier
returns for funds of hedge funds
were off only fractionally, more than 8 percentage
Year in review beating the industry aver- points. In 2009, as of
age by more than 20 per- November, the index was
Recovery has not centage points. This year, up 10.72 per cent,
been swift. Will as of November, global
macro has registered gains
outperforming the bench-
mark by 133 basis points.
2010 prove better?, just north of 8 per cent, According to Mr Peres, full
asks Eric Uhlfelder trailing the industry by
13.5 percentage points. The
transparency may not be
driving performance, but he
strategy delivered absolute feels EIM’s ability to dis-
In 2008, the average fund of returns, but in the cern risk has been a con-
hedge funds got walloped, context of the 2009 bull tributing factor.
losing 55 basis points more market its performance After being hurt by its
than the average hedge looked sluggish. exposure to Bernard Mad-
fund, which lost 21.63 per According to Mr Waks- off, which precipitated a
cent, according to industry man, managers were also rapid decline in its world-
tracker BarclayHedge. challenged by the fact that wide assets from $50bn to
In spite of the market 2009 was among the most $23.8bn as of June, Union
recovery in 2009, in relative bifurcated years on record. Bancaire Privée has
terms, funds of funds did In the first quarter stocks responded with a range of
worse still. As of the end of were hit by a relentless sell- risk management improve-
November, the Barclay- off that eroded any remain- ments. They include the
Hedge fund of funds index addition of seasoned leaders
was up 9.37 per cent while from the hedge fund indus-
the average hedge fund was Managers were try, including Dan Kelly
up 21.54 per cent. The S&P also challenged by who was the chief risk
500 equity index did better officer of Harvard’s endow-
still, gaining 24.07 per cent. the fact that 2009 ment fund, to enhance
The promise of greater
security from judiciously
was among the Bernard Madoff (left) outside court in New York. Union Bancaire Privée improved risk
research, strategy and risk
management.
melding funds into a great- most bifurcated management after it was hurt by exposure to Madoff Bloomberg UBP has divided invest-
er composite seems as dubi- ment management, pricing
ous as the notion that
years on record and asset verification, with
hedge funds are a source of Many investors were hurt ers could not be certain To discern aggregate risk all funds required to use
absolute returns, with ing confidence that one because the sudden how aggregate risk was for funds of funds requires third-party administrators.
investors suffering the could, in effect, bottom-fish industry-wide withdrawal of reduced or enhanced by the much of the same analysis It has created a risk man-
added insult of an extra a down market. This was leverage transformed a way in which total expo- needed to assess individual agement group that is inde-
layer of fees. then followed by an extra- patient medium-term strat- sure was blended. hedge funds, says Mr Pap- pendent from portfolio man-
Industry observers sug- ordinary bull market that, egy into something it was Ron Papanek, head of anek, including stress test- agement and one that has
gest several reasons for this to many, appeared to be not – a short-term trade. business strategy at Risk- ing, liquidity assessment, veto power over the entire
substantial underperform- driven more by the depths Without sufficient liquidity Metrics, an aggregator of and historical and condi- investment process. UBP
ance. First, some managers to which securities had to meet redemptions, more portfolio-level data, says tional value at risk. now has greater focus on
have found themselves sunk than the return of than 150 of these funds that “last year demon- According to Paulo Peres, asset-liability matching to
locked into funds that held more promising fundamen- were forced to gate, tempo- strated more clearly than director of risk manage- attempt to ensure custom-
substantial portions of illiq- tals. Managers who had rarily suspend or wind ever the need for fund of ment at EIM – an $8.5bn ised risk and liquidity
uid investments in sidep- already been burned were down their operations. funds managers to have a global manager that cus- through new portfolio con-
ockets. These are places therefore not going to Many of these issues affect- clear understanding of con- tomises multi-hedge fund struction.
where funds can set aside invest aggressively into a ing funds of fund perform- centration and the risks programmes for more than According to Christopher
specific assets from being bear market rally. ance were then com- associated with their com- 100 institutional investors – Ito, managing director of
liquidated to meet redemp- Then there was the issue pounded by insufficient posite portfolios. At the absolute transparency was UBP, the bank is presently
tion requests. Restricted of a significant reduction in transparency. This pre- same time, hedge fund man- just one of five key lessons designing a so-called two-
access to assets prevented leverage, which had been vented many managers agers are increasingly learned from the 2008 melt- pillar approach in portfolio
managers from reallocating vital for helping funds of from truly knowing their aware of the need to make down. Over the past year, construction to offer inves-
into funds and strategies funds generate profits that composite risk in terms of their portfolios transparent the proportion of the com- tors a customised balance
that rebounded in 2009. more than cover their addi- sector, asset class, cur- to pension funds, endow- pany’s underlying funds between liquidity and per-
Funds of funds were also tional layer of expenses. In rency, leverage and related ments, foundations, and providing trade-level data formance.
hit by a massive decline in the arena of asset-backed duration. Moreover, manag- fund of fund managers.” has jumped from 50 per “This would be accom-
assets. According to Sol loans, a traditionally profit- cent to 100 per cent. plished by offering a series
Waksman, founder of Bar- able, low-risk strategy, the BarclayHedge fund indices Independent and full-serv- of short-term liquid strate-
clayHedge, third quarter sudden elimination of lever- YTD Performance ice third-party administra- gies that target modest,
2009 fund of funds assets age effectively froze nearly Number of through Nov 2009 tors are essential to ensur- steady returns and less liq-
funds (%)
were $596bn (£367bn, all funds of funds. ing accurate pricing and uid but longer-term strate-
€414bn) down from their According to Jonathan BarclayHedge Fund Index 2456 21.45 trade information. Mr Peres gies that seek greater gains
2007 peak of nearly Kanterman, managing Convertible Arbitrage Index 34 49.41 believes a fund should not over a longer period,” says
$1,200bn. Mr Waksman says director at Stillwater Capi- Distressed Securities Index 65 26.67 engage in trading, borrow- Mr Ito.
this deterioration in net tal Partners, who runs both Emerging Markets Index 392 39.79 ing or lending with any bro- By means of devising cus-
flows and performance has individual ABL hedge funds ker-dealer that is a related tomised asset allocation,
Equity Long Bias Index 285 25.81
also made it challenging to and fund of funds, several entity. There needs to be coupled with offering
allocate cash into more major banks were forced by Equity Long/Short Index 519 12.70 independent custody to greater access to managed
promising funds. regulators to improve their Equity Market Neutral Index 96 -0.03 ensure legitimacy of assets. accounts, Mr Ito believes
Kristoffer Houlihan, capital ratios. To help do so, Equity Short Bias Index 9 -14.58 And EIM will not invest in UBP will be able to deliver
director of risk manage- they reduced their leverage European Equities Index 168 14.94 funds which in turn invest better asset-liability match-
ment at Pacific Alternative facilities across the board. Event Driven Index 118 26.48 in other funds that do not ing and transparency.
Asset Management Com- ABL funds of funds were permit unrestricted due dili- In addition, UBP is refin-
Fixed Income Arbitrage Index 36 16.93
pany, a fund of funds man- then forced to return hun- gence of their operations ing its special risk manage-
ager with $9bn in assets, dreds of millions of dollars Fund of Funds Index 1405 9.39 and records. ment strategies, applied
also attributes much of the to the banks by redeeming Global Macro Index 138 8.19 Using its Multi-Strategy during periods of extreme
industry’s lacklustre per- shares in underlying funds. Healthcare & Biotechnology Index 31 24.14 Composite Index as a proxy drawdowns. This will in-
formance to a greater aver- This in turn squeezed indi- Merger Arbitrage Index 21 10.69 for two-thirds of its US clude the use of volatility
sion to risk. vidual ABL funds to either Multi Strategy Index 74 24.15
products, EIM’s perform- trading and hedging, and
For example, some man- liquidate positions in a ance suggests it is manag- will complement the bank’s
agers sought refuge in glo- lousy market or lock up Pacific Rim Equities Index 71 13.72 ing risk well. existing opportunistic over-
bal macro, a generally con- capital until they could dis- Technology Index 37 19.01 In 2008, this index lost 14 lay practice that continu-
servative, steady strategy. pose of loans or collateral in per cent, outperforming the ously seeks to deliver alpha,
Source: BarclayHedge.com
In 2008, global macro funds an orderly manner. average fund of fund by or excess returns.
.