LONDON (HedgeWorld.com)–Fund of funds managers expect returns to pick up in the final quarter of 2006 with the recent burst in volatility in global markets driving many investors to seek more risk-adverse strategies, according to a new poll commissioned by Reuters.
The poll pinpoints global macro, long/short Japan and emerging market strategies to make the most improvements in returns in the final quarter. The quarterly survey, conducted between May 24 and June 6, polled 12 fund of funds managers, which together manage $81 billion. Lipper HedgeWorld is a wholly owned subsidiary of Reuters Group.
Optimism about returns is little changed from the previous poll conducted in March, notwithstanding the sharp falls during May in emerging markets, commodity prices, and stocks. However, the new survey shows a slight reduction in demand for long/short strategies from the March sounding.
“We believe we have to stick to quality and that can be found in multi-strategy managers that have a reduced beta and can weather some form of market correction,” Robert Khoury at Union Bancaire Priv?? 1/2 e told Reuters. Mr. Khoury said UBP had reduced its long/short equity exposure in the past two months to 30% to 35% from 40% to 43% previously in some of its more aggressive portfolios.
The survey period closely followed a sharp rise in market volatility in the wake of a number of quarters when volatility was at historically low levels. Data from numerous sources shows that some hedge fund managers were caught by surprise. Despite the ensuing poor returns by some managers, hedge funds have traditionally thrived on volatility.
Now that theme is returning. “We like all volatility-related strategies as it appears to be coming back,” said Mark Yusko at Morgan Creek Capital Management. “So much money left the convertible arbitrage and merger arbitrage space that we are raking it in with our managers in those spaces,” Mr. Yusko added.
Morgan Creek’s best strategy for the second half of the year is expected to be energy trading. “There has been a tremendous loss of capital from the energy trading business and that usually leads to strong returns for those who stick around,” said Mr. Yusko. He said he expects energy markets to be volatile during the summer because of inventory concerns and the hurricane season in the United States.