Investors turn to niche funds as market volatility builds

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.