Green shoots in hedges; more funds look East

After the brutal scorching, some green shoots are emerging in hedge funds. The second half of 2008 saw the liquidation of 1,200 hedge funds.

So, managers can be forgiven for cheering when news broke last week that “only” 376 funds had liquidated in the first quarter of this year.

According to data firm Hedge Fund Research Inc, the average fund returned 5.2% in May instead of losing money. Investment tracker Morningstar Inc noted that emerging market funds were especially hot, returning 13% on an average.

US hedge funds with exposure to emerging markets did well on the back of the 33.6% rise in emerging market equities in the second quarter. Kenneth Heinz, the president of Hedge Fund Research, said, “We don’t like to look at things from the perspective that we’re over the hump. What we’re looking at is a continuation and increase in the level of risk tolerance in investors.” 

A large number of US hedge fund managers say they see the best opportunities in emerging markets, given the outlook of a weak US economic recovery over the second half of this year.

Kent Gasaway, a portfolio manager at Buffalo Funds, said, “Where’s the growth going to be? It’s going to be in emerging market countries. People will figure it out. They’re going to need more exposure there to get any growth in their portfolios.”

Hedge fund manager Kenneth Paterson told DNA Indian voters had given the Manmohan Singh government a ballot box endorsement for carrying out reforms and Budget 2009-10 would signal the government’s intentions.   

“We expect (finance minister) Mr (Pranab) Mukherjee to sell the family silver at some stage to fund the government’s rural and social programmes. I think the Indian stock market will be able to absorb the share sales,” said Paterson.

Money managers are also eyeing the country’s infrastructure firms as the FM is expected to announce further plans to repair India’s infrastructure, where investment is currently pegged at 6%. That figure could rise, boosting Larsen & Toubro, GMR Infra and others.

Michael Hartnett, chief global equity strategist at Bank of America-Merrill Lynch, said he expects emerging market investors to become less China-obsessed in the second quarter and forecast a US dollar rally and a short-term pullback in commodities.

“Performance within emerging market equities is likely to shift toward domestic demand in the second quarter, boosting infrastructure and consumer stocks as also those of banks,” said Hartnett.

The biggest evidence that investors are regaining confidence in the $1.3 trillion hedge fund industry comes from the fact that 150 new hedge funds were launched in the first quarter. Crain’s, which tracks New York business, reported that Financial Technologies Forum (FTF) drew 100 people for its ‘How to launch a hedge fund’ seminar.

Boosted by the response, FTF has scheduled a second hedge fund start-up session in September. According to the organisers, strong interest has been seen in China, India and Brazil at these sessions.