* Event, valuation-focused strategies in vogue
* Year-to-date performance good for more active funds
* Stuttering stock markets put fresh focus on short-sellers
By Simon Jessop
MONACO, June 20 Hedge fund managers who seek out
quick returns from company turnarounds and short-term bets on
specific assets are in fashion as investors ponder their next
move after long rallies in stocks and bonds.
Diverging central bank monetary policy, a rise in corporate
deal-making and the potential for more market volatility have
increased the appeal of nimble funds that can still make money
in choppier, falling markets, said delegates at a hedge fund
industry gathering this week.
"It's a special situations environment... You have to go for
factors which are direction-agnostic," said Pragma Wealth
Management's Nacho Morais on the sidelines of the GAIM
conference in Monaco.
A so-called 'special sit' is a trading opportunity based on
corporate events such as mergers and acquisitions as opposed to
the underlying fundamentals of a security, and is a technique at
the heart of the 'event-driven' hedge fund strategy.
Among such funds doing well in 2014 are Lombard Odier
Investment Managers' 1798 U.S. Special Situations Fund, up 9.7
percent in the year to May, and Greylock Capital Management's
Greylock Global Opportunity Fund (Offshore) Ltd, up 8.9 percent,
data from Preqin showed.
Many managers at the event in the tiny Mediterranean
principality were focused on strategies reliant on a 'bottom-up'
analysis of an asset, rather than trying to profit from
macroeconomic bets or following trends in financial markets.
With the U.S. and UK central banks on a path to tighter
fiscal and monetary policy, in comparison with the euro zone and
Japan, where further loosening is expected, some showed a
growing appetite for less conventional investment positions that
offer a hedge should market gyrations intensify.
That means favouring "activist" hedge funds that encourage a
company to change its strategy, "distressed" funds, which buy
assets trading at a sharp discount to their intrinsic value, or
long-short equity funds, which can bet on stock prices falling.
Among distressed funds doing well in the year to May was
U.S.-based Phoenix Investment Adviser's JLP Credit Opportunity
Fund, up 7.25 percent, Preqin data showed.
Data tracker eVestment said activist strategies had their
best monthly performance for 17 months in May, rising 4.46
percent, while distressed funds, which look to profit from
buying cheap or "distressed" assets, rose 4.75 percent to be the
best performing strategy in the year to date.
For Michael Rosenthal, who invests in hedge funds at wealth
manager Signia Wealth, the scale of cash sitting on company
balance sheets at a time of weak growth meant there were likely
to be many more corporate deals in coming months.
"If you can't grow organically, you grow by acquisition...
There are going to be more deals," he told the conference,
adding that it was important to pick the right strategy to
profit from this and other trends.
"It's a combination of art and science, but it's very much
about being in the right strategies as well as the right
managers at any given point in time," he said.
With valuations in some markets looking frothy, managers
would need to work harder to find value, said Pragma's Morais:
"Equities are only cheap in relation to fixed income, which are
After rising 30 percent in 2013, the Standard & Poor's 500
share index is up 5.9 percent in 2014 to a record, while
the VIX volatility index, gauging expectations of a sharp
move in S&P 500 options, is at a level not seen since early
2007, before the onset of the financial crisis.
With U.S. Treasury and UK gilt yields likely to rise
further, Morais said managers needed to be flexible: "We are one
year into a large shift. For the past 30 years, the interest
rate environment was for ever-declining yields.
"Now this has shifted so the train of thought of the
managers needs to change."
Mark Cook of Swiss private wealth manager Octogone Gestion
said he was looking for managers who have "convictions".
"A lot are overly diversified and lacking conviction, in a
world where there's too much money chasing too few opportunities
and where assets are expensive, on all historical metrics."
Much of the near-$3 trillion held by hedge funds globally, a
record, is in large, multi-billion-dollar funds that find it
hard to move in and out of big positions quickly and have poorer
returns, eVestment data showed.
As a result, any correction in the stock market could leave
them behind, said Cook.
"Too many managers cannot move their positions any more and
don't have the stamina to get ready to short when they'll need
(Editing by Tom Pfeiffer)