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Bruised hedge funds tentatively looking for risk again

EconomyApr 21, 2020 01:25AM ET
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© Reuters. FILE PHOTO: A screen displays trading information over the floor of the New York Stock Exchange (NYSE) in New York

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - After a tough March, some hedge funds, emboldened by early signs of the coronavirus outbreak peaking in some of the biggest U.S. hot spots, have begun tentatively adding to risk.

Worries over the economic hit from the virus slammed riskier assets in February and March. Still, hedge funds outperformed the market, with the HFRX Equity Hedge index down 9.58% in March, compared with a 12.5% decline for the S&P 500 Index.

"In long/short equity there is a small amount of re-risking that has been going on for the last two weeks but not back to the risk levels that we saw in February or the start of March," said Rob Christian co-head of research and investment management at hedge fund solutions group K2 Advisors, part of Franklin Templeton Investments.

"Managers are being selective, buying good, solid businesses that have cash flow going forward and shorting indexes or weak companies," he said.

U.S. stock markets have partially rebounded from the trough of 2,191.86, touched by the S&P 500 (SPX) on March 23, and through Monday, had risen 30% from that low. Hedge funds have followed suit in rebuilding risk.

One way to measure hedge funds' risk taking is to track their equity beta sensitivity - or their sensitivity to equity market movements. For fundamental value hedge funds globally, net exposure to developed market stocks as measured by their 30-day rolling beta recently stood at about 0.8, compared with under 0.7 at end-January, according to Nomura.

For U.S.-based hedge funds, net leverage - a measure of how much risk they are taking as they chase returns - fell during the March selloff to the lowest it has been since 2010 but "both gross and net (leverage) have bounced back," according to a recent report by Morgan Stanley (NYSE:MS)'s prime brokerage team.

Funds relying on systematic strategies such as risk parity and commodity trading advisors (CTAs), which were partly blamed for aggravating the recent selloff by off-loading risk when the markets were most vulnerable, have also been buyers recently, analysts said.

Despite the buying by some hedge fund styles, macro hedge funds, which place bets on macroeconomic trends using index, currency and interest rate strategies, have remained sellers.

"The stock market is still in the midst of a standoff between technically oriented CTAs and fundamentals-focused macro investors," Masanari Takada, cross-asset strategist at Nomura Securities, said in a note on Thursday. If global macro funds join the buying spree it could give the stock market another leg up.

MAX FEAR PASSED

Some funds that are betting on the market retesting its lows are still looking to do some buying in certain areas. James McDonald, CEO at Los Angeles-based alternative investment manager Hercules Investments has a trade which would profit from the stock market dropping back to March lows. While a majority of his buying would occur once such a pullback materializes, the fund has been making "incremental buys," McDonald said.

He likes the U.S. Global Jets ETF (P:JETS), the VanEck Vectors Gaming ETF BJK (O:BJK) and the iShares Expanded Tech-Software ETF (Z:IGV), among others as recovery plays.

Funds running the risk parity strategy, which automatically allocate money to major asset classes based on signals such as volatility levels, were particularly hard hit during the volatility spike in March.

Funds with a volatility target of greater than 10% and less than 15%, logged a loss of 12.3% for the month of March, their worst monthly loss since October 2008, according to the HFR Risk Parity Index.

Now that systematic funds have started adding to risk, they may well help support the rally by being incremental buyers as volatility settles, said Damien Bisserier, partner at Advanced Research Investment Solutions, a Los-Angeles based investment management and consulting firm managing about $12 billion in assets.

Bisserier, however, warned that markets are likely to remain choppy in the near term.

Dev Kantesaria, portfolio manager at equity hedge fund manager Valley Forge Capital Management (VFCM) in Wayne, Pennsylvania, said he thought "the maximum fear around coronavirus has passed."

VFCM, which was down 4.9% for the Jan-March quarter, compared with a 13.3% fall for the HFRX Equity Hedge index, according to the fund, has been adding to its positions in companies with strong organic growth such as ratings agency Moody's Corp (N:MCO), payments company Mastercard Inc (N:MA) and credit scoring firm Fair Isaac Corp (N:FICO).

"I expect to see an increase in risk-on exposures as managers are positioning for a slowing rate of virus contagion growth," said Ken Heinz, president of Hedge Fund Research.

Bruised hedge funds tentatively looking for risk again
 

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Comments (3)
Star Boi
Star Boi Apr 21, 2020 4:33AM ET
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This is what happens when you deregulate the banking system. Banks begin to market speculate. The focus shifted from depositors and retuning fair value, instead preference to bank shareholders. Only the retail banks now speculate with your money, and investment banks form cartels to rig commodities, rates etc for themselves and their preferred investor clients. Retail banks = retail customer, business and mortgage loans. The specific ethical issues that characterised the financial crisis included manipulating credit ratings, the mis-selling of securities, unauthorised trading and the short-selling of bank shares by Investment Banks. In addition, there are long-standing ethical concerns regarding practices such as market manipulation and insider dealing aided by new custom encryption messaging platforms under their control with no records or proof kept on meetings. Goldman clients weren't happy with the leak of notes now were they? ;)
Kaveh Sun
Kaveh Sun Apr 21, 2020 1:22AM ET
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Hedge funds suppose to hedge which mean they are protected for the down. Nowaday, they are just traders. When the pool is dried, they got caught swim “n aked”.
Star Boi
Star Boi Apr 21, 2020 1:22AM ET
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Hedge funds should be about hedging, not manipulating and setting up predatory traps in the market place. They are instructed by their managers and investors to focus on maximizing portfolio returns. Thus it should come as no surprise that not all hedge fund traders put obeying federal securities laws at the top of their to-do lists. In the hedge fund environment, traders are more likely to brag about their superior results than their willingness to sacrifice those results to preserve their ethics and don't see their behaviour as unethical or harmful, but as a “victimless” crime that may contribute more accurate market prices. For every trader who reaps a gain using insider information, some investor on the other side of the trade must lose.
Notvery Goodathis
Peteymcletey Apr 21, 2020 1:18AM ET
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How many funds took SBA loans? 🤔
Kaveh Sun
Kaveh Sun Apr 21, 2020 1:18AM ET
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We all want Free money.
Laine David
Laine David Apr 21, 2020 1:18AM ET
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SBA loans/grants.
Star Boi
Star Boi Apr 21, 2020 1:18AM ET
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Kaveh Sun  What you have today is a free for all (them). Today they want free money because when the risk strategy doesn't play out, they want taxpayers to foot the bill. This all amounts to double and triple-dipping taxation via a back door (the rich tax on the middle-class plebs).....Oh, by the way, taxation is at an all-time low (hahaha), sure it is.
 
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