Saturday, June 20, 2009
Hedge Fund Managers Cautious About the Year Ahead
By Barbara Kollmeyer
Better fasten those seat belts, investors, because if hedge fund managers have any insight at all, the credit crunch and market turmoil may not be over yet.
About 800 gathered for the GAIM International hedge fund and alternative investment event in Monaco. A year ago, with 1,000 in attendance, the conference was kicking off just as markets were starting to fall apart, with the biggest slump yet to come. Of course, it should be noted that hedge funds have been blamed by many for contributing to last year's financial mess. As for the look ahead, a survey of attendees by conference organizers revealed that 65% of those polled expect the crisis to "rumble on," with just 17% saying it was over and that same amount expecting the crisis to diminish significantly. It was an almost even draw for the question about whether market volatility has permanently jumped higher or not. Of those polled, 54% said yes, while 46% said no. Their biggest concerns, in descending order, are market liquidity, lack of alpha, risk management and counterparty risk. Russell Abrams, founder and senior portfolio manager of Titan Capital Group, which manages hedge funds using volatility arbitrage strategies, said 2009 could shape up as mirroring 2008 somewhat. Overly optimistic earnings expectations for the second half could be one big catalyst, he said. "The second half of the year has built in very high expectations and if they're not met, we're going to see nervousness that is going to move very rapidly," said the New York-based Abrams.
The other catalyst that markets will be looking for, he said, is signs that Federal Reserve Chairman Ben Bernanke may not be nominated for a second term. President Barack Obama has praised Bernanke for his efforts in the financial crisis but has been mum on whether he'll reappoint the Fed chief. Investors can protect themselves the next time around, he said, by understanding that they need a plan for when an event happens - and need to stick to it. Abrams said their four funds did well because "we know what we do if the stock market falls 5%. Our basic investment advice to anyone is if you don't know what you'll do if the stock market falls 10%, you shouldn't be in the stock market," he said. "What they need to know is the higher people's expectations of volatility, the more it becomes a self-fulfilling reality - once you have an expectation of wider moves, they will be occurring," said Abrams. "People are still very complacent in terms of not doing the research themselves to know what's really going on."
The GAIM poll revealed that managers are focusing strategies over the next 12 to 18 months on distressed securities, global macroeconomics - based on primarily on overall economic and political views of various countries - and commodity trading advisers, or CTAs - funds that trade futures on raw materials. Abrams has two types of funds that trade volatility: One has an absolute return strategy, while the other is a defensive bias fund set up to do much better if there is a crisis. He said a lot of volatility is now priced into the stock market, meaning he's looking elsewhere for returns. "We're seeing a lot of opportunity in the currency space, a lot of countries' currencies are perceived as very stable. We don't know what the catalyst will be. Historically, if the U.S. ever starts raising rates, it creates tremendous pressure on emerging market countries. They have to raise their rates and it hurts their economies," he said.
Most affected, he said, would be Eastern Europe and highly leveraged countries where there seems to be no way out of the mess without devaluing the currency. He notes that forward markets are pricing in a devaluation of 50% for the currency of Latvia, one country hard hit by the financial crisis. Seppo Leskinen, the London-based chief investment officer of Skandinaviska Enskilda Banken, said emerging currencies are a big theme for him as well. He runs the SEB Multi-Manager Currency Fund and said they've had a bias toward emerging markets the past two years. As for the major currencies in the short term, he said the dollar will benefit as stimulus efforts begin to kick in: "I feel once [stimulus efforts] they start to bite, the American economy is ready to go and could go really, really strongly." But for the longer run, Leskinen said, the strength is not that convincing. "I think the shift of the world's economies has gone to China and India and these BRIC (Brazil, Russia, India and China) economies. They are the new economy superpowers in the economic world. "I wouldn't be surprised if in five to 10 years from now, China's currency is freely floating so these countries are still very tiny but the shift of the investments will continue to go that direction very strongly and then the same has to happen in the currency markets," said Leskinen.
Looking At Credit
Neal Neilinger, the Stamford, Conn.-based vice chairman of Aladdin Capital, said that looking at the broader market, he doesn't expect the second half of the year to be as good as the first half. "But I also wouldn't say I'm negative. We will see probably a leveling off of the market and maybe from today, slightly up from where we are today." He said big issues for the hedge fund conference have centered on transparency, liquidity procedures and due diligence - logical given what happened at the end of last year. "I think that the tone is cautiously optimistic. I think investors are looking for ideas, looking for ways to deploy capital, but they're looking to do it in a very directed and strategic approach. They're not coming here to find out what they want to do; in most cases they know what they want to do." Neilinger, whose firm has traditionally operated as a fixed-income manager, said he still believes in credit as an investment idea.
"Yes, it's had a big run since the beginning of the year, but it's still far cheaper than it was toward this time last year, so I do think there's value in it and I do think you can deploy capital intelligently right now whether it be on some of the higher-yielding names, which offer still very wide spreads - even in the high-grade investment range, which still is attractive," he said. Neilinger sees big interest returning to the corporate credit markets and likes non-investment grade, leveraged loans and distressed debt. New issue markets are having record years in terms of volume in the U.S., and Europe investor demand is tremendous, he said. "Every deal that gets priced is many times oversubscribed. In some cases when a deal gets launched, it's oversubscribed in less than in less than 20 minutes," Neilinger observed. "We're now back to being able to do non-investment grade bond issues, which for all intents and purposes last year was closed, and leveraged loan markets are starting to wake up again. We're seeing the beginning of some of the sponsors being able to do bond deals again." He notes that those deals have to be well-priced transactions and well structured. While cautious on auto-industry suppliers and some retailers and airlines, he says oil or gold-type companies seem to be holding up a lot better and probably have better prospects. "You still have to be very careful about how you select what you're going to invest in. ... We find there are opportunities still to pick up individual names and credits at spreads that are attractive and avoid pitfalls of buying companies that are in a more precarious position."
Again, caution is the byword for Neilinger, something that would probably ring resoundingly well with most of those present here this week. "You can explain to your boss once why you lost money in credit. I wouldn't want to be there the second time," he said.
(Source: Dow Jones)