Friday, February 15, 2008
Barclay Roundtable: FoFs Side Step Landmines and Post Market Beating Returns for 2007
Will Funds Migrate Toward More Liquid Strategies as Liquidity Dries Up in Some Credit Sectors?From the Quarter 1, 2008 issue of "Barclay Managed Funds Report" published by BarclayHedge. The full report also includes 24 hedge fund and managed futures performance ranking tables and in-depth manager profiles. Subscribe. View Roundtables from back issues.
John Beech, Financial Risk Management
Scott C. Schweighauser, Harris Alternatives, LLC
Stephen C. Vogt, Ph.D., Mesirow Advanced Strategies, Inc.
Our panel of experts answers these questions:
The media might have us believe that the sub prime debacle and resulting credit crisis spelled doom for the hedge fund industry. The Barclay Fund of Funds Index, however, ended the year +8.86%, proving to the contrary. In your estimation, how were the most successful funds of funds able to weather the storm? Was diversification the key, or do you suspect that there was significant active rotation away from credit exposure (and possibly positioning toward net short credit exposure)? What other strategies were favorable and why?
Some fund of funds managers have employed macro hedges in their portfolios to offset certain exposure or to even take advantage of significant dislocations (e.g., ABX protection, variance swaps, equity options and futures). Do you expect that more fund of funds managers will migrate to this type of overlay strategy, or is it best to leave the trading to the underling managers? What limitations, if any, should investors expect of their fund of funds managers who are engaged in this activity (e.g., trades should only be employed during significant periods of stress, maximum exposure levels to these trades, etc.)?
For a time investors were being paid a handsome premium for taking on illiquidity. Now, however, we are seeing the risk part of the equation in illiquid strategies. To what extent are funds of funds shifting their underlying investments to more liquid strategies? How might increased investor demand for liquidity impact the redemption and lock up terms for fund of funds and the underlying hedge funds?
Prior to the credit crisis, hedge fund and fund of fund IPOs were closing at a rapid pace. Once the markets normalize, how do you expect hedge fund and fund of fund IPO activity to progress? What are the advantages and disadvantages to the manager going public? What are the advantages and disadvantages to the investors?
It seems that the largest funds of funds continue to attract the bulk of the institutional allocations while small funds of funds struggle to grow. In what ways might consolidation be a viable option for smaller fund of funds? Do you expect the trend in consolidations to continue? What are the potential drawbacks of the big funds getting too big?
During 2007, Emerging Markets, Macro, and Merger Arbitrage were among the top performing hedge fund strategies. Over the next 12 months, which strategies do you expect to be the best performers and why? Which do you expect to underperform and why?
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