2016 Hedge Fund PredictionsAuthor: Kathryn Gaw
This is the year that will separate the great hedge fund managers from the betadriven funds. Traditionally, hedge funds can be classified as either ‘alpha’ driven (where the actions of the fund manager drives returns), or ‘beta’ driven (where the activities of the stock market or wider economy drives returns). Beta driven funds are often seen as the safer options, but for the first time since the global financial crisis, managers are witnessing volatility across every sector – even these socalled ‘safe bets’.
iDeals Virtual Data Room heavily relies on the hedge funds performance, so here we investigated for you what to look forward to in 2016.
For a start, oil prices are languishing at their lowest prices in more than a decade, Japanese bonds have finally gone negative, and even Western equities are acting unpredictably, following recent crashes in London, Tokyo, and New York.
This means that hedge fund managers have to work harder than ever if they want to beat the market and earn their fees. It is only during market volatility that the truly skilled managers can be identified – whoever ends 2016 with double digit returns will be well worth an investment come 2017.
So what investment trends can we expect from hedge funds in the year ahead?
After a rocky start to the year, 2016 hedge fund predictions are more muted than usual – and with good reason. In January, hedge fund returns fell by an average of 2.76 per cent, while the S&P 500 fell by 5 per cent. These drops were largely triggered by longonly hedge funds, which are heavily invested in equities and high yield fixed income, and therefore weighted against global stock market performance and sovereign funds.
On the other hand, this same market turmoil offers a unique opportunity for agile managers to truly show what they are made of, by hedging their portfolios and focusing on niche sectors and financial futures.
In particular, the negative bond offerings in Japan have been described as a ‘once in a lifetime’ shorting opportunity. Japan still has a strong economy, and it is highly unlikely that the government will keep rates below zero for long. For riskaware hedge fund managers, it’s a no brainer.
Managed futures have also outperformed the market so far this year. As longonly portfolios (i.e. portfolios which do not ‘go short’) suffer from poor beta performance, many clients prefer the relative liquidity of managed futures. Meanwhile, conservative fund managers can use financial futures (i.e. predicting market movements and buying stock accordingly) to offset losses from other parts of their portfolios.
Five hedge funds to watch in 2016
1. Passport Special Opportunities Fund Class AA (equitydiversified/global)
John Burbank’s $550 million long/short global equity fund was one of the big winners of 2015, ending the year on 17.8 per cent. In January, while most other equity funds were struggling, it ended the month up by another 16 per cent.
2. Tulip Trend Fund, LTD A (managed futures)
In a clear reflection of market conditions, this Progressive Capital Management fund fell by 8.8 per cent over the course of last year, before rising by a whopping 12.4 per cent in January alone. A good bet in volatile times.
3. Roy G. Niederhoffer Diversified Offshore Fund (managed futures)[MB1]
Niederhoffer’s over seven and a half milliondollar fund grew by nearly twelve per cent between 1 January and 3 February 2016, after ending 2015 on a modest 4.3 per cent.
4. Renaissance Institutional Diversified Alpha (multistrategy)[MB2]
Noteworthy, while the average multistrategy fund fell 0.47 per cent last month, this large fund ($1.47 billion) grew by 7.3 per cent. It has been performing rather well since it was established in 2012, producing average annual returns of 9.8 per cent, and 15.6 per cent over the course of last year.
5. AAM Absolute Return Fund (equitydiversified/global)
Harald Otterhaug’s $184 million fund run was a huge success story last year, ending 2015 up more than 58 per cent. Clearly a skilled manager, his challenge this year will be to emulate last year’s success and maintain a manageable scale. So far so good – the fund was up 6.7 per cent in January 2016.