(Clarifies in paragraph 6 that the figures refer to alpha, not
* Hedge funds beating the S&P 500 so far this year
* Average performance hides wide dispersion of returns
* Brevan Howard fund closure shows emerging market risks
By Laurence Fletcher, Blaise Robinson and Simon Jessop
LONDON/PARIS, Feb 28 A sell-off in emerging
markets has given hedge funds a chance to prove they can profit
from even the most testing market conditions - and try to
justify their lucrative fees.
These are conditions in which hedge funds are meant to be
able to outperform, using their much wider array of trading
tactics to capitalise on default risks, currency routs and share
After underperforming regular stock benchmarks for the past
five years, this year they have just about managed to beat the
market, according to Hedge Fund Research's HFRX index, gaining
0.9 percent this year to Feb. 25 compared with a 4.7 percent
fall in the MSCI Emerging Markets index and a 0.3
percent gain in the S&P 500 Total Return index.
Even so, some are struggling, as shown by Brevan Howard's
decision to shut its $2.3 billion emerging markets fund.
Analysis by asset manager BlackRock of last year's hedge
fund performance underlines the wide divergence in perfomance. link.reuters.com/hab37v
An investor who chose the most successful hedge fund
strategy last year - equity hedge, for example - could have seen
outperformance, or alpha, of around 20 percent in the best
performing funds or minus 15 percent in the worst.
Even the top funds would have lagged a pound, dollar or euro
invested in a major index such as the Standard & Poor's 500
, up 30 percent.
But pension funds and others with a lower risk threshold
also use hedge funds because their greater tactical scope adds
to the options for achieving less volatile, and in some cases
more profitable returns than just tracking the market.
"Last year, you could just buy beta (track the market) in
both equities and credit, and sell gold and Bunds. This year ...
it's much more complicated," Philippe Ferreira, head of
research, alternative intestments, at Lyxor AM.
"In this context, investing in hedge funds is a good way to
get protection and decorrelation with the market, and in that
sense hedge fund performance in January showed they did just
that: strategies with less directionality producing positive
results while stock indexes fell."
In fund management overall, market-tracking "passive"
strategies are expected to grab market share from "active"
strategies by 2020, a recent study from consultants PwC found.
But assets under management in alternative investments, which
include hedge funds, will more than double to $13 trillion, PwC
The wide spread of absolute returns found in the BlackRock
analysis is even more marked when comparing the amount of
outperformance generated by the funds.
Using the example of last year's top returning strategy,
equity hedge, for example, the study found the average fund
actually detracted from the performance, while strategies such
as event-driven added nearly 4 percent of alpha.
"The dispersion shows the average hedge fund return is very
different from what's available in the hedge fund universe,"
said Mark Woolley, hedge fund analyst at BlackRock, adding that
"the greatest return does not necessarily mean the greatest
amount of alpha".
A bounce off January lows has given way to a slow grind
higher on many global stock markets with increased volatility.
That pattern is expected to persist as the U.S. central bank
cuts back on its cheap funding injections, China moves to
tighten up on risky lending, and emerging market weakness weighs
on recovery prospects in developed economies.
Winners so far this year, according to the HFRX index,
include Cumulus Energy fund, up 21.9 percent to Feb. 14, and
Horseman Global, which had gained 9.4 percent to Feb. 19,
according to data seen by Reuters.
But Brevan's Emerging Markets fund fell 15 percent last year
and a further 1.6 percent in January, while its Emerging Markets
Local Fixed Income fund is down 0.2 percent.
BlueCrest's Emerging Markets fund is down 0.2 percent so far
this year, while U.S.-based Contrarian Capital's Emerging
Markets fund fell 6.2 percent in January but made back most of
those losses this month.
With so many political and economic troubles undermining the
road to high returns in emerging markets, chosing a successful
fund is not getting any easier.
"We think the difference between good and bad emerging
market economies is going to get more pronounced, which will
make it trickier to perform," said Odi Lahav, CEO at Allenbridge
(Editing by Ruth Pitchford)