Financial Risk Management Ltd., a unit of the world’s largest publicly traded hedge-fund manager Man Group Plc, may see the best return from its multistrategy funds of funds since 2009, said its chief investment officer.
Pools investing in hedge funds that trade different asset classes using various strategies may return 8.5 percent this year, as appetite increases for risky assets and markets move less in lockstep with each other, London-based Keith Haydon said in an interview yesterday, citing internal analysis.
Hedge-fund returns rebounded in the last four months amid signs global economic growth is recovering and as concerns over the European debt crisis abated. The Federal Reserve has pumped more than $2 trillion into the financial system in three rounds of quantitative easing since the global financial crisis of 2008, while the U.S. unemployment rate last month dropped to the lowest since December 2008.
“We’ve got reasons to think that central banks are beginning to back off quantitative easing,” Haydon said. “And there’s a slightly more positive growth picture, a more heterogeneous one.”
FRM, acquired by Man Group in July, manages all of the latter’s $16 billion of fund-of-funds assets and the seeding business that provides capital to new managers. Haydon was put in charge of the unit that accounts for more than a quarter of the group’s assets after former FRM CIO Luke Ellis was promoted to president of Man Group as Chief Executive Officer Emmanuel Roman reshuffled the team to improve performance and stem six consecutive quarters of outflows.
The HFRI Fund-Weighted Composite Index returned 6.4 percent last year, the second-weakest performance of the last four years behind the 5.3 percent loss in 2011 as macroeconomic uncertainties damped market sentiment and returns. The index gained 4.6 percent in the last four months amid signs of economic recovery in the U.S., a soft landing in China and hopes of stimulus in Japan.
Of FRM’s assets, $9.5 billion were in the diversified funds of hedge funds by the end of last year, according to Haydon. The largest of them returned 13 percent in 2009 and 1.8 percent in 2012, he said.
The 8.5 percent expected return for this year is based on stable markets or investors willing to take on more risks for better returns by moving assets from the bond market into stocks, Haydon said.
The HFRI Fund of Funds Composite Index rose 11 percent in 2009, the best in the last four years. It advanced 4.7 percent last year. Investors in a Deutsche Bank AG survey last month said they target returns of between 5 percent and 10 percent for their hedge funds this year.
FRM’s diversified funds have increased allocations to event-driven funds by 5 percentage points to 9 percent since December, he said. Funds that make bets around both announced and expected corporate deals may be among the best performers this year as more confident company executives are pressured by shareholders to make better use of their cash and private-equity investors become more active, Haydon said.
In the past month, two blockbusters were announced: the $27 billion purchase by Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital of ketchup maker H.J. Heinz Co., and the $24 billion Dell Inc. takeover offer from Michael Dell and Silver Lake Management LLC.
FRM mainly increased allocations to event-driven funds it already invested in because of the difficulty of finding managers who do not simply buy stocks of the target companies and sell borrowed stocks in the acquirer, he said.
FRM has also increased investments since 2009 in quantitative market-neutral funds that hold stocks for three to four days and have significant investments in Asia.
The strategy is expected to benefit from the withdrawal of bank capital and greater likelihood of stocks trading independent of each other this year with an influx of capital to the equity market, he said.
FRM’s seeding unit in 2010 backed San Francisco-based Sensato Capital Management LLC, which employs a quantitative market-neutral strategy and is run by two former co-heads of active equity strategies at Barclays Global Investors Ltd. Assets of the fund that trades Asian stocks using computer models topped $1.1 billion by November.
The firm has kept its investments in Asia steady with a mild reduction of allocations to emerging market macro funds, said Haydon. The former macro proprietary trader at Morgan Stanley, HSBC Holdings Plc and Deutsche Bank AG said he is cautious about Japan trades.
“The currency has moved a long way quite quickly and I personally think there are risks against that,” said Haydon. “So far, the currency has moved only on rhetoric. There remains the need to introduce policies quickly and that’s never easy in Japan.”