June 17, 2010 / 12:18 PM / 9 years ago

Macro hedge funds best despite May dip -Lombard Odier

* Sees strong macro trends continuing into 2011

* Volatile markets to help global macro strategy

* Consolidation looms for funds of hedge funds By Martin de Sa’Pinto

MONACO, June 17 (Reuters) - Hedge funds taking directional bets on markets will be among the best performers in 2010 as concerns over the health of major economies continue to dominate markets, said Lombard Odier’s head of hedge funds advisory.

Cedric Kohler said on the sidelines of the GAIM hedge funds conference that strong trends in currencies, equities, debt and commodities could help the strategy known as global macro to prosper into 2011 despite a disappointing May.

“The overall environment has been driven by macro events in 2010, and I believe it will continue to be the case because of economic imbalances in the largest markets,” said Kohler, whose team at the Geneva-based private bank oversees a fund of hedge funds and advises clients on hedge fund investments.

With markets highly volatile, he said macro managers benefited from their ability to take long or short positions in most markets, trade in very liquid products and change positioning nimbly if their view of the economic outlook changes.

“That’s not the same for all asset classes; there has been a significant drop in liquidity in areas like credit, making it difficult to turn around portfolios when the market moves against you,” he said.

CS/Tremont data show global macro strategies lost 0.63 percent in May, which Kohler said was disappointing, because such strategies should have performed well in a month when pressure on euro zone economies triggered heavy market declines and sent the euro into tailspin.

“The losses were caused because people were worrying about liquidity and simplifying their trades, with many ending up in the same trade for different reasons,” he said.

For example, he said, managers who had been short the euro and long the Australian dollar switched into a euro-dollar trade, which they thought mirrored their original trade and offered better liquidity, while managers playing the Greece theme avoided credit default swaps on worries about a regulatory ban, and used euro-dollar trade as a proxy.

“So people were using same instruments for different reasons, exacerbating volatility in those instruments.”

While Kohler said funds of hedge funds should thrive after a difficult two years, he expected their numbers to fall.

“There’s going to be industry consolidation. Those funds of funds which are too small or do not have a clear strategy will either close or be bought,” said Kohler.

“But prices won’t be high. People won’t be buying their strategy or their distribution, just their assets under management,” he said. (Editing by Will Waterman)

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