Investors in risk love-or-hate bind


Reuters | Sep 10, 2010 | 8:02pm IST

With world stocks still in the red for the year, investors are becoming jumpy and impatient, torn between the need to deliver returns in a low-yield environment and pressure to preserve capital in a volatile market. Even with the threat of a double-dip U.S. recession subsiding, lingering uncertainty over the economy and corporate profits means investors are keen to take profits quickly as any hint of negative data or news can easily rattle their confidence. This nervous, defensive mood is becoming more apparent among hedge funds. The $1.5 trillion industry lost money again in August as stock markets turned south. Stanley Druckenmiller — a key architect of billionaire George Soros’ famous bet against sterling — is closing his hedge fund firm after 30 years. Another hedge fund manager, Paolo Pellegrini, plans to return his investors’ money this month.

This is just an example how hard it has become to make money in a skittish market for many investors, especially ahead of the November U.S. mid-term elections, where President Barack Obama’s Democrats could face big losses. "Given the uncertain outlook, we are maintaining a defensive stance and remain focused on capital preservation," noted Dirk Wiedmann, chief investment officer of Rothschild Private Banking & Trust. Even within its defensive stance, the bank’s allocation to hedge funds stands at a high 18 percent. "The performance of hedge funds in aggregate has been disappointing… In recent months, correlations between and within asset classes have been extremely high, with fluctuations in the economic outlook driving the performance of a wide range of investments," Wiedmann said.

World stocks, as measured by the MSCI world equity index, are down around 2 percent this year, having traded in a relatively tight range in the past 2-1/2 months. The coming week brings no shortage of data which could determine the near-term economic outlook and investor risk tolerance. Key Chinese indicators and U.S. retail sales data are among them. Hedge funds lost 0.49 percent in August, bringing their year-to-date gain to 1.3 percent. According to Bank of America Merrill Lynch, hedge funds’ net exposure to equity markets — measured as long-minus-short positions as a percentage of capital — stands at 22 percent, near a 16-month low of 18 percent set in July. Before the crisis, their exposure went as high as 55 percent in mid-2006. The ratio of gross assets held by hedge funds relative to their capital stood at 1.16, compared with a 2006 peak above 2.3 percent.

TUSSLE

The poor performance of hedge funds may be one reason why more conservative investors are also getting defensive. A survey by Fidelity Investments released in the past week showed pension plans are moving away from equities and into fixed income as their concerns about funding shortfalls grow. Pension funds, whose typical return target is 8 percent; have moved into hedge funds as a result of a greater focus away from benchmarks onto liability-driven investment strategy, based on a company’s risk tolerance and the target return. The survey, which polled U.S., Canadian and European pensions which oversaw more than $2 trillion in assets also showed almost two out of three pension plans saw a need for downside protection when markets tumble.

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