Why Investors Are Happy With Hedge Funds

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June 19 (Bloomberg) –- Agecroft Partners Founder and Managing Partner Donald Steinbrugge and Bloomberg Contributing Editor Fabio Savoldelli discuss hedge fund performance. They speak on “Market Makers.” (Source: Bloomberg)

Outperform the s&p 500. people make that comparison anyway.

But what are they trying to outperform?

The most recent study done, the results could not be more diametrically opposed for people who keep comparing them to the s&p. 59% of investors are looking for uncorrelated returns.

84% feel that if you remove hedge funds they would have a higher level of volatility.

When you look at them, almost 60% are looking for a return somewhere between three percent-five percent a year.

And they are measuring that over a three year or longer environment.

It is simply not an s&p relative product.

The happiness of investors -- 84% are either holding or are looking to add funds.

So if that is the standard, how are hedge funds doing?

Basically, they are doing good.

Most institutional investors are happy with hedge funds.

Each year, institutions sit down and analyze asset allocation and come up with forward-looking return assumptions.

Most pensions have 25-36% fixed income.

Most hedge funds have more of a four percent-seven percent return.

As long as hedge fund returns are higher than fixed income, you will see people go into that.

Last year, they did about 11% above expected returns.

That's why they're happy.

Only seven percent of investors are looking for high returns from the hedge funds.

They are measuring purely on a return basis, let's put it that way.

45% out there are measuring on a live our pus or t-bills plus type environment, which is not relative.

Are there some strategies outperforming others or doing better than others.

Credit, credit, credit, liquidity, long liquidity, credit.

Activist are investing as well.

May have done well and they have a lot of eta.

They don't tend to hedge the positions.

If you look at the overall activist indices, one of the challenges -- the area with the most interest is long-shorts.

The second largest is macro funds.

Activist, although money keeps flowing in, is an flowing in at the rate you might thing because the correlations are so much higher.

A lot of activist fun alongside are not hedging the positions.

It's also very challenging for merger arbitrage or and event driven strategies, it is a challenging market.

Those indices are only about two percent, very small.

Do you see investor money flowing into hedge funds that have underperformed or performed poorly, generated negative results, negative returns, for example?

Bloomberg covered this in depth yesterday.

Tudor for example.

Fortress hasn't been doing so hard.

Do investors look at that as an opportunity or a reason to invest with other people?

Most of the money comes from institutional investors and they are buying brands.

They have too much money to manage.

They can generate the same returns they could when they were small.

I think it's a big issue for the hedge fund industry.

I think the smart money, family offices, funded to funds, they tend to invest in smaller, more nimble managers, and they are looking at managers not necessarily with the most to store it track records, -- his store it track records, but the ones who are going to be -- historic track records, but the ones who are going to do the best going forward.

Look at the move index, the volatility index, the bond equivalent of the vix, not quite the same.

But it is extremely low.

Extremely low levels of volatility.

What we see is every time they reach these low levels, eventually they start to turn around.

As the fed starts withdrawing and the european markets continue to flood, you're finally going to get a divergence globally, and you are setting up.

The only place they can make you money in that place is macro.

They love it, then hate it, then turned back again.

When the world is awash in money and everything is running parallel, it is hard to do.

But macro is the second most queried strategy after long-short.

People are starting to think you know what?

If this thing turns, i need something to make me money, and macro is the place to do it.

Equity valuations right now are near historical averages.

I think we're going to see return trades on the s&p between four percent-10%. that is where managers can make that money on the shorts.

We just had a strong bull market.

There's high correlation between stocks.

I think the correlation is going to decouple.

I like lending.

I like margaret neutral -- market neutral strategies.

I think there are ways to make money, but most of the markets are pretty expensive.

You talk to top hedge fund managers and advise some of these men and women.

What are they worried about?

The market is extremely competitive.

If you look at peak when data, only five percent of assets have been going to hedge funds and only one percent are going to hedge fund managers with $100 million or less.

Smaller ones have significantly outperformed larger ones.

Small ones are having a hard time raising money.

I might take the other side of that just for fun.

I think a lot of strategies like direct lending and structured credit require a lot of continued liquidity.

When liquidity dries up, the credit risk inherent in the direct lending strategies and and structured credit can come back and be painful.

There are a lot of very successful, smart and bs guys who trade without credit risk, but the guys trading on the low-end can find themselves on the wrong side of the cycle if and when the fed ever actually does have to decrease global liquidity.

The only comment i would make is that if you do direct lending, make sure the structure is similar to a private dead vehicle with a very long walk up , because you're correct.

That is not liquid.

It's like private equity.

In 2008, firms got in trouble because of liquidity.

You need a long lockout.

This text has been automatically generated. It may not be 100% accurate.

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