Age and beta influence returns
It may not be an easy feat to pick a top-of-the-line hedge fund from a herd of flies, but the Covid 19 survey has managed to sift through the chaff to present the winners. The top 50 funds generated an impressive 13.6 percent annualized net returns since inception, putting them on par with their aforementioned peers. A closer look at the stats suggests some of the Top 50 are old-timers, and the average age of a Top 50 fund is roughly 13 years of age.
Among the funds that made the cut were two notable obscurities, the macro oriented Global Fixed Income and the credit long-only. In the grand scheme of things, both of these strategies were stymied by the benchmark 3.4 percent return attributed to the mortgage-backed securities sector. These strategies tended to rely on pure alpha generation to deliver their respective magic numbers.
Several other top-of-the-line funds were left off the list, including a few of the bigger names in the industry. Of the few worthy contenders, the multi-strategy Wellington and the octopus helmed multi-strategy Tactical were able to outperform their ilk. However, the latter topped out in the bottom quartile.
Despite the sexy performance of the macro-oriented Global Fixed Income, the credit long-only was the bottom of the list. While the multi-strategy Tactical ruled the roost, the credit long-only was the lowest ranked of the Top 50 funds. Other notable omissions included several high-performing equity long-only funds, a few naysayers and the aforementioned ol' money.
With a top of the line sized staff, a robust technology portfolio and a nifty new office space, the multi-strategy helmed Wellington should be a winning bet. As with any successful hedge fund endeavor, the key is to avoid the noise and stick to your guns. Hopefully, the ensuing lessons learned will translate into better returns for your portfolio in the long run. Good luck. Hopefully, the Top 50's most savvy occupants will get the chance to show off their wares next year.
Absolute return strategies
Absolute return strategies are a type of investment product that seek to generate positive returns with limited volatility. They are able to do this by diversifying risk within a portfolio. However, these products are not a panacea. While they can offer some diversification benefits, they can also contribute to over-diversification.
Absolute return strategies are used by hedge funds and can be implemented with a variety of investment tools. These include long and short equity strategies, fixed income strategies, derivative-based products, and active alpha management.
Several absolute-return funds have recently made their way onto the market. Some investors have found them attractive because they promise a specific return regardless of the market. This is important for conservative investors who want to limit losses.
Absolute-return strategies may also have benefits during a bear market. For example, they can limit the impact of volatility and reduce correlation to traditional benchmarks. In addition, they can also be a good complement to traditional relative return funds.
Absolute-return investments are becoming increasingly popular for pension funds. Pension funds often allocate a small percentage of their assets to alternative investments. During eventful times, such as the 2008 sell-off, this allocation can prove beneficial.
Absolute-return investment strategies also attract higher performance fees. This is because investment managers have unique ways of generating returns. Moreover, their ability to provide clients with good news can be a selling point.
In the past, nonstock absolute-return funds accounted for a relatively small percentage of the total hedge fund industry. However, this trend has increased in recent years. The asset value of these funds has grown from PS90.3 million in December 2011 to PS99.4 million in March 2012.
Absolute-return funds also offer investors some protection in the event of a stock market crash. By limiting the amount of exposure to traditional markets, these funds can provide a diversified anchor for any portfolio.
The key advantages of absolute-return investments are their independence from conventional benchmarks and the lower volatility of the returns they generate. As such, they are suitable for conservative investors who have limited exposure to the equity market.
Regulation of hedge funds
Regulation of hedge funds is a topic of debate. Some argue that there is little benefit from the regulator's involvement, and others point to the potential risk. Nonetheless, it is important to recognize the impact that regulation can have on an industry.
The market for hedge funds is a fast-growing sector. In the past, hedge funds were often unregulated, with few regulations to protect investors. However, in the years leading up to the 2008 financial crisis, there was growing awareness of the risk associated with the funds.
Several regulators questioned whether the industry was sufficiently transparent. As a result, the SEC began to investigate ways to bring hedge funds under its regulatory authority. It also proposed expanding the antifraud protection available to private investors.
The SEC's rulemaking efforts were justified by the increased risk involved with hedge funds, the emergence of the CFTC's rules, and the retailization of the industry. Among the benefits of the rule were improved compliance controls, and the resulting curtailment of losses.
Until the Dodd-Frank Act of 2010 required all hedge fund managers to register, the industry largely avoided regulation. Nevertheless, the regulatory net has grown to include smaller firms and hedge fund managers based in London and New York. As a result of the rule, most hedge fund advisers have deregistered. But the SEC has continued to provide guidance in the form of no-action letters.
And counterparties still continue to request copies of corporate documents for hedge funds.
A regulated fund manager is essential to the survival of the business. Firms that have a regulated fund manager must adhere to the regulator's directives, including a requirement to incorporate the fund, and perform a variety of due diligence measures.
Most regulated fund managers have contracts with administration agents that require robust compliance procedures. These agencies are obligated to conduct KYC, or Know Your Client, on their partners. Additionally, some regulated firms apply enhanced due diligence.
When you decide to invest in a hedge fund, you should take the time to understand the risk factors and consider the investment's performance. For example, the average hedge fund produced net annualized gains of 7.2 percent through 2021.
Negative performance during the Global Financial Crisis
During the global financial crisis, many hedge funds experienced negative performance. Several studies analysed the performance of various strategies during the crisis. Some of the research focused on ten strategies, while others studied a variety of other strategies. The research was designed to address a number of questions and provide an assessment of potential implications for future hedge fund investments.
Research conducted during the financial crisis focused on quantitative data on the performance of hedge funds. It was based on monthly returns of a number of major hedge fund strategies. Researchers also assessed the correlation between hedge fund strategies and the benchmark S&P500. Various factors were considered to explain the variation in performance.
Research used both conventional risk frameworks and Carhart's four factor model to evaluate performance. In particular, research examined reward-risk characteristics of strategies. Strategies were ranked based on their persistent performance and their ability to perform better than the market portfolio during the research period.
Among the strategies, seven outperformed the market portfolio during the research period. The research found that illiquid hedge funds had lower returns and alphas. However, there was no evidence that copycat behavior was involved.
While the study did not explore the performance of hedge funds for the last ten years, the results are still applicable. There was a significant drop in assets under management by hedge funds during the financial crisis. These funds used leverage and short selling. Most of them closed down.
One of the major concerns raised by researchers is that the financial markets may be manipulated by hedge funds. This concern is especially strong after allegations of large transactions in Asian currency markets in 1998. Bollen cites the concern as a possible explanation for the underperformance of hedge funds. He attributes this to the massive liquidity in financial markets and regulatory reforms.
Although the research was designed to address a number of important questions, there are still several open research questions. Specifically, additional studies should investigate the effects of hedge fund strategies' correlations with the S&P500 and their ability to preserve value. Studies should also examine whether predictive models are capable of selecting individual funds that will outperform