Hedge funds seek chance to shine in QE slowdown
LONDON (Reuters) - Hedge funds view the prospect of an end to U.S. money printing as a chance to buy riskier assets, including troubled euro zone bonds and U.S. stocks, and show they can perform better when markets are less predictable.
A Reuters survey of 14 European and U.S. hedge fund managers, collectively managing approximately $90 billion in assets, found the end of so-called quantitative easing in the world's largest economy was regarded as a buying signal, not the start of a long bear market.
For hedge funds, the chance to mark themselves out from other investors is much needed.
Over the past 5 years the average fund is up 2.5 percent, a poor record given the sector's high fees and claims to be able to profit in any market.
The recent sell-off in bonds and stocks has hit bellwether funds such as Bridgewater, the world's largest, and computer-driven BlueTrend hard.
Hints from the Federal Reserve of an impending slowing of its $85 billion monthly bond-buying program sent European and emerging market stocks tumbling last month and pushed yields on 10-year Treasuries up to 2.74 percent in early July from 1.62 percent in early May.
Yields dipped to 2.58 percent on Thursday, the day after Fed Chairman Ben Bernanke told a conference "accommodative" policy was still needed and the shrinking jobless rate may be giving the wrong impression of U.S. economic health.
Nevertheless, many funds hope uncertainty over the Fed's actions will offer up buying opportunities, while the eventual ending of quantitative easing will favor their trademark stock-picking style, giving the $2.4 trillion sector a chance to win over clients after lackluster returns in recent years.
One manager at a multi-billion dollar firm said valuing assets would be easier after Fed stimulus was pared, and that filling the system with cash had created a gap between bonds and stocks so big that "one or the other market had to be wrong".
"All it is pouring cold water on a market that's been mispriced," he said.
Some European funds have used that sell-off to increase their holdings of those stocks and bonds hit the hardest.
"We've been buying where the most extensive sell-off has been," the manager said, explaining the appeal of investment grade and high yield bonds of financial firms and an overall portfolio bet that asset values will rise rather than fall.
On a scale of 1 to 5, with 5 the highest, fund firms surveyed rated the market significance of QE withdrawal at 3.4. The result suggests that, while important, hedge funds have few fears about the disappearance of Fed purchases, despite the almost catastrophic falls in emerging markets seen in June.
The survey also found that 10 out of 12 managers believed Bernanke's comments in May and June on tapering quantitative easing were a turning point for markets.
On average, hedge funds proved resilient in the face of June's big market adjustments, losing just 1.33 percent, according to Hedge Fund Research. So far, funds are up an average 3.77 percent in 2013.
Funds are now dipping their toes back into markets that they consider have over-corrected.
Philippe Gougenheim, CEO of Swiss-based Gougenheim Investments, upped his net long position to 20-25 percent from 10 percent late last month, buying U.S. stocks via an index and futures contracts on short term rates in dollars, sterling and euros, with maturities up to end-2014.
And Tim Haywood, investment director at GAM, bought long-dated Treasury Inflation Protected Securities (TIPS), corporate bonds and Irish government bonds.
"We think the market is somewhat oversold and on that basis we have been rotating into newly cheap assets," he said.
Funds have also taken advantage of rivals still reeling from the sell-off to buy "companies with good balance sheets, showing better growth, and with exposure to the U.S. economy, housing market and auto market recoveries", said Justin Sheperd, partner at Aurora Investment Management, which invests in hedge funds.
Some funds are also eyeing emerging markets, an area hit by some of the sharpest falls as U.S. yields have risen.
The MSCI Emerging Markets index has tumbled 14 percent over the past two months, while emerging market sovereign and corporate yields are up by around 90 basis points.
"A 25 percent drop in emerging markets seems irrational to me," said Bill Street, head of investments EMEA at $2.2 trillion asset house State Street Global Advisors. "The only news we have had is a confirmation of the potential unwinding of QE, and in principle that should be good for emerging markets."
LNG Capital's Louis Gargour said he is weighing up corporate debt in Greece, Ireland, Spain and Italy, where valuations were more affected by sovereign than the individual firms' fortunes.
"For us, smart money is looking at the European peripheral corporate debt. It's not an obvious trade but there are lots of good trades to be found."
But not everyone sees the sell-off as a buying opportunity.
Scott Gibb, partner at Cube Capital, said he had put on short positions on some commodities in part of his portfolio.
And one manager at a major hedge fund said he is wary of buying bonds and would view any rally as a chance to go short.
"My personal belief is that it (QE tapering) will start in September. They'd be idiots not to," he said. "Once the worm turns, the convex of the movement can be severe," he warned.
(Editing by David Cowell)
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