Investors turn to niche funds as market volatility builds

Hedge fund managers opt for event-driven strategy amid diverging monetary policies by central banks and a rise in corporate deal-making

PUBLISHED : Monday, 23 June, 2014, 3:08am
UPDATED : Monday, 23 June, 2014, 3:08am

Hedge fund managers who seek out quick returns from company turnarounds and short-term bets on specific assets are in fashion as investors ponder their next move after long rallies in stocks and bonds.

Diverging central bank monetary policy, a rise in corporate deal-making and the potential for more market volatility had increased the appeal of nimble funds that could still make money in choppier, falling markets, said delegates at a hedge fund industry gathering last week.

"It's a special-situations environment … You have to go for factors which are direction-agnostic," said Pragma Wealth Management's Nacho Morais on the sidelines of the GAIM conference.

A so-called special sit is a trading opportunity based on corporate events such as mergers and acquisitions, as opposed to the underlying fundamentals of a security, and is a technique at the heart of the "event-driven" hedge fund strategy.

Among such funds doing well in 2014 are Lombard Odier Investment Managers' 1798 US Special Situations Fund, up 9.7 per cent in the year to May, and Greylock Capital Management's Greylock Global Opportunity Fund (Offshore), up 8.9 per cent, data from Preqin showed.

Many managers at the event were focused on strategies reliant on a "bottom-up" analysis of an asset, rather than trying to profit from macroeconomic bets or following trends in financial markets.

With the United States and British central banks on a path to tighter policy, in contrast to the euro zone and Japan, some showed a growing appetite for less conventional investment positions that offer a hedge should market gyrations intensify.

That means favouring "activist" hedge funds that encourage a company to change its strategy, "distressed" funds or long-short equity funds, which can bet on stock prices falling.

Among distressed funds doing well in the year to May was US-based Phoenix Investment Adviser's JLP Credit Opportunity Fund, up 7.25 per cent.

Data tracker eVestment said activist strategies had their best monthly performance for 17 months in May, rising 4.46 per cent, while distressed funds climbed 4.75 per cent to be the best-performing strategy in the year to date.

For Michael Rosenthal, who invests in hedge funds at wealth manager Signia Wealth, the scale of cash sitting on company balance sheets at a time of weak growth meant there were likely to be many more corporate deals in coming months.

"If you can't grow organically, you grow by acquisition … There are going to be more deals," he told the conference, adding that it was important to pick the right strategy to profit from this and other trends.

"It's a combination of art and science, but it's very much about being in the right strategies as well as the right managers at any given point in time," he said.

With valuations in some markets looking frothy, managers would need to work harder to find value, said Morais. "Equities are only cheap in relation to fixed income, which are ultra-expensive."

After rising 30 per cent in 2013, the S&P 500 Index has gained 5.9 per cent in 2014 to a record, while the volatility index, gauging expectations of a sharp move in S&P 500 options, is at a level not seen since early 2007, before the onset of the financial crisis.