Lyxor bets on hedge funds’ outperformance
Hedge funds will outperform traditional asset classes over the coming years, Lyxor said in a whitepaper published last July and entitled “A new era for hedge funds ?”
Normalisation of US monetary policy and US equities’ loss of momentum will drive hedge funds’ outperformance, the firm’s research explains, foreseeing annual excess returns of 5% to 6%.
Jean-Marc Stenger (pictured) and Philippe Ferreira, respectively CIO Alternative Investments and senior cross asset strategist at Lyxor, held a mid-September press briefing in London to discuss the company’s paper.
“Something has changed in the way investors allocate to hedge funds in their portfolios. Inflows are being ever more recorded in that space,” Stenger said.
What has astonished Stenger the most is that new investors such as corporate pensions funds, first and second-tier insurance companies are entering the hedge fund space.
For the first half of 2015, hedge funds have posted $40bn (€35.9bn) inflows according to Lyxor’s data whilst alternative Ucits funds available in Europe have recorded €43bn in net new money in the seven first months of the year. Regarding alternative Ucits’ inflows, July has even been a peak with €8bn inflows recorded.
Lyxor posts itself $11bn (€9.8bn) of assets under management invested in hedge funds. Its platform tallies around 80 hedge funds.
Stenger also stressed that the recent assets recorded have not been part of a reallocation from other alternative strategies but from main equity and bond portfolios.
Lyxor’s CIO for alternative investments did not deny hedge funds underperformance in the past five years in comparison with traditional asset classes. However, he underlined that on a long term period, the trend both reverses in absolute terms and on a risk adjusted basis.
“Since 1990, hedge funds have outperformed traditional asset classes and balanced portfolios in absolute terms. Annualised returns after fees have reached above 10%. Hedge funds have been generating alpha with an average of 4.5% per year between 1990 and 2015,” he said.
Stenger has attributed hedge funds’ recent underperformance to the Fed’s quantitative easing policy and markets driven by liquidity. Other reasons dwell in structural components such as the institutionalisation of the hedge fund space, he highlighted.
“Institutional investors now represent two-thirds of the hedge fund investor base, up from 20% ten years ago,” Stenger added.
The 10% rise in the operating cost of hedge funds, as showed by KPMG in a 2013 survey, has impacted the asset class’ performance too.
Stenger said the recent flows in the hedge fund space have resulted from opportunistic and tactical moves. Lots of institutional investors went through or are about to do the strategic review of their portfolios, leading them to invest in non traditional assets such as infrastructure, private equity or hedge funds.
Ferreira even outlined “a turning point” reached by the asset management industry. “Pressure remains high on institutionals to diversify their portfolios, particularly fixed income ones. They are under pressure as well on the equities holding, especially US equities because they are expensive.”
“The choice is then quite limited. It remains complex to buy infrastructure since they are very few assets in the market and private equity is not liquid by definition. Hedge funds are getting ever more liquid and transparent and their fees have decreased massively,” Ferreira added.
Stenger argued that standards no more exist in hedge funds fees and considers it as a sign of maturity of the asset class. “Asking the same fees for a long short strategy and a global macro one for which you use lots of instrument does no longer make sense.”
Ferreira said that as the environment is set to change in perspective of a Fed rate hike, a new era will open for hedge funds. He asserted that hedge funds currently outperform other asset classes with a “comfortable margin of 3%.”
He also highlighted volatility’s crucial role in the performance of hedge funds.
“Market conditions are unstable now and we expect to see more instability.
“China’s slowdown is impacting the global economy and the markets meet difficulties to understand what Chinese authorities really want to do. This is contributing to the markets’ uncertainty on top of the questions marks around the Fed rate hike. In this environment, volatility is set to raise. Markets are returning a more normal volatility compared to recent years,” he commented.
“In August, hedge funds have outperformed other asset classes because being a long short player gives you more flexibility in such a market environment,” he added.
Ferreira warned that structural resilience will no more be found in balanced portfolios with traditional asset classes. Like Stenger, he said there will be no other choice for investors but to try something different. In a word, an alternative.
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