Corporate restructuring and recovery in the equity markets are boosting the outlook for long/short a...
Corporate restructuring and recovery in the equity markets are boosting the outlook for long/short and event driven strategies across the globe.
In the 12 months to the end of September the S&P Long/Short Index has returned 6.15% which compares with 4.94% for its equivalent event driven benchmark and just 0.41% for the S&P Arbitrage Index.
F&C is focusing its long/short asset allocation on the European market while Investec prefers to look towards the US and Asia.
Alex Kokkinos, head of the product team for the investment management division at Investec Private Bank, which buys funds direct as well as funds of hedge funds (FoHF).
He says: "We are expecting long/short equity to do well going forward especially in Asia and the US. We are seeing a lot more FoHFs allocating more money into this type of strategy. We believe as volatility picks up and the markets find direction the good stock picking managers will be able to add alpha from both upside and downside in the equity market - preferably with an asymmetric return profile."
Europe is where F&C has an overweight position in long/short. Francois Barthelemy, head of investments and manager of the F&C Select FoHF feels this strategy has benefited from improvement in European equity markets especially on the long side. Companies have rebuilt their balance sheets and earnings are looking good.
Another area Barthelemy is overweight in Europe is event driven. He says: "This is because corporations have started to realise that they have to treat shareholders properly. For example, Deutsche Börse was prepared to spend money on the London Stock Exchange. A number of hedge fund managers who were heavily invested in Deutsche Börse were not happy about this and helped stop the bid."
Barthelemy has a neutral weighting to this strategy in the US but thinks he may well upweight strong in the first half of 2006. In the US, corporate balance sheet are very strong and managements are doing a lot to buy back shares and re-leverage balance sheets, according to F&C. Barthelemy sees this as good news for shareholders, especially in an environment where corporations are keen to return value to shareholders via buybacks.
One area of agreement between F&C and Investec is their wariness towards convertible arbitrage. Although Kokkinos is seeing a pick-up, the S&P Arbitrage Index gained 0.93% in September, he only expects this strategy to give back some of the losses it has seen in recent times.
He believes far too much hot money has flowed into the strategy, reducing the returns available, and the result is investors are now pulling out of the sector or engaged in a flight to quality.
Kokkinos says: "Long gone are the days of consistent double digit performance year after year as the strategy gets squeezed and opportunities become scarcer - proceed with caution."
Barthelemy is underweight this strategy because he feels a lot of money has been deployed in the area and there is too much capital chasing too little return.
Long/short strategy set to perform well in US, Asia and Europe.
Event driven will benefit from corporate restructuring in the US and Europe.
Managers wary on convertible arbitrage.
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