2010 likely to be more testing for hedge funds

Hedge funds making big bets on currencies, commodities and equities are favoured by fund selectors in what is likely to be a more testing 2010 after a bumper year for hedge fund returns, it is claimed.

Many fund managers think countries will emerge from the global downturn at different speeds. The UK, for example, was still in recession in the third quarter while some trading partners had begun growing in the second quarter meaning loose monetary policies may be tightened at different times.

Managers believe this presents a perfect opportunity for global macro funds, which bet on currencies, interest rates, commodities and stocks and which were made famous by firms like billionaire George Soros's Soros Fund Management.

It's a good environment for stockpickers. Conditions are good and the imbalances are still very significant,’ said AXA Investment Managers' Chris Manser, who runs $6 billion in fund of hedge fund assets.

According to Omar Kodmani, senior executive officer at Permal Investment Management Services, global macro is currently a favourite strategy.  ‘Global rebalancing is an ideal theme for macro managers. Different countries will come out of the downturn at different speeds and there will be opportunities to play the differences,’ he explained.

Some global macro firms have been so swamped with new cash in anticipation of these returns that they have chosen to turn potential investors away. Paul Tudor Jones' Tudor Investment Corp told clients at the end of the third quarter that his flagship BVI Global Fund had reached its ideal capacity.
During the first 11 months of the year funds specializing in fixed income-convertible arbitrage strategies gained 55.46%, according to Hedge Fund Research, far more than the average hedge fund's 19% return and helped by a huge rebound in convertible bond prices.

However, among large investors and industry consultants the sense is that savvy investors are now backing out of their bets on credit that earned them so much money this year. ‘I get the sense that investors are moving from one manager to another,’ said Thomas Lynch, managing director at Cliffwater, a consulting firm which advises pension funds.

Many funds of hedge funds believe an environment in 2010 widely tipped to be characterised by lower than average growth and difficulty in accessing credit will sift the strong companies from the weak.