December 8, 2009 / 11:18 AM / 10 years ago

Hedge funds wary of sting in tail to strong year

LONDON (Reuters) - Hedge funds have been taking their bets off the table in November and December, wary of a last-minute sting in the tail to a turnaround 2009 for the industry, battered by poor performance in the credit crisis.

Prime brokers and managers say some funds in the secretive industry have decided to cut back risk after the market’s fall in late October, so as not to endanger gains which have reached an average of 15.1 percent in the first 10 months of the year, according to Credit Suisse/Tremont.

“Leverage is coming off towards the end of the year. Hedge funds are happy to take what they’ve got from 2009,” said one prime brokerage executive, who asked not to be named.

This year's gains have been helped by a rebound in asset prices. The FTSE 100 .FTSE for instance is up by more than 50 percent since its March low, while convertible bonds and credit have also risen sharply in value.

That comes after a turbulent 2008, when funds lost an average 19 percent, damaging a reputation acquired during the dotcom bust for making money in all market conditions, and heavily shrinking the size of the industry.

While many funds like to point to performance over three or five years, investors often look at calendar year returns when assessing their investments.

The Financial Services Authority’s prime brokerage survey shows leverage — an indicator of risk appetite — crept up between October 2008 and April 2009 to around 1.2 times, while prime brokers say it rose to around 1.4 times by the autumn.

But there is some anecdotal evidence suggesting it may have fallen back since then.

“We are seeing funds’ trading volumes and activity decline ... and see this in context of good returns, generally, for the year,” said Mark Bailey, Bank of America Merrill Lynch’s head of global markets financing and futures, EMEA.

MAKES SENSE

The FTSE 100 suffered a wobble at the end of October, losing as much as 6 percent on fears an early withdrawal of government stimulus could damage the global economic recovery.

Investors pulled $330 billion (202 billion pounds) of cash from the industry during four straight quarters of redemptions, and only returned with a tiny net inflow of $1.1 billion during the third quarter, according to data from Hedge Fund Research.

“It stands to reason, especially after 2008, that if you’ve had a good year in 2009 so far and markets are getting a bit wobbly, you don’t want to lose a few percentage points in December and maybe you deleverage,” Odi Lahav, vice president at Moody’s alternative investment group.

Funds may also be cutting their risk exposure because of seasonal factors, such as market liquidity.

“From mid-November to December, funds tend to reduce exposure. The markets tend to become less liquid from mid-December,” said Arie Assayag, chief executive of New York and Paris-based hedge fund firm Nexar Capital.

And fears that some of the assets that have performed best this year are simply overvalued also play a role.

“In credit markets, if you’re in high yield or leveraged loans you’ve had 50 percent gains year-to-date but spreads are no longer very compelling, so it makes sense to dial down risk,” said another hedge-fund executive.

To read the Reuters Hedge Fund Blog click on blogs.reuters.com/hedgehub; for the Global Investing Blog click here Editing by David Cowell

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