Funds of hedge funds have had mixed returns over the past 12 months, with good performers making st...
Funds of hedge funds have had mixed returns over the past 12 months, with good performers making strong strategy choices early enough to avoid the poor performing areas such as merger arbitrage.
The Dexia World Alternative Alpha EUR C fund, with $184.95m assets under management, is ranked eighth over the period and the fund's performance has been 14.8%.
In November last year, the fund was underweight event-driven strategies, which represented less than 5% of assets under management, according to senior fund manager Jean-Sebastien Debusschere.
He identified merger arbitrage as being a 'dead' strategy, with too many players chasing the same opportunities. It was too soon to enter the distressed market at this stage as the economic environment looked set to become worse, says Debusschere. 'We felt we should not try to enter the strategy at the top and that is still the case today.'
The fund has maintained an allocation to managed futures CTAs of 5%-8% as an insurance against volatility following 11 September. It decreased allocation to convertible arbitrage from 11% last November to 8% in June. Since then it has risen to 11% and may rise slightly more, says Debusschere. In November 2001, the strategy became crowded creating an imbalance between supply and demand and the underlying funds began to find it difficult to make returns, according to Debusschere.
The increase in allocation came as a result of convertible arbitrage managers identifying new opportunities largely by spreading into credit arbitrage.
'The rules of the game changed,' says Debusschere, and he was able to identify a couple of good convertible arbitrage managers in credit arbitrage, which caused him to bring the fund to a neutral weighting in the strategy.
What has made the fund stand out from others in the asset class over the period is its allocation to fixed income strategies, says Debusschere. It has always had a bias in that direction, but the bias has been accentuated over the last year.
Part of the fixed income holdings of the fund is in mortgage backed securities.
Many managers and investors are afraid of this strategy as they associate it with LTCM and now Beacon Hill, according to Debusschere. He believes this fear is unwarranted. 'No two strategies in this market are the same,' he says. 'The mortgage-backed securities market is the largest in the world and there are lots of opportunities there and lots of talented players.'
The fund has held 22%-25% in long/short equity over the year, despite it being a tough time for the strategy. There are different types of long/short equity within the fund, says Debusschere, including pure long/short equity, with a net long bias and market neutral, which encompasses statistical arbitrage.
Two-thirds of the fund's long/short allocation is in market-neutral funds and a third in pure long/short with a value bias. Debusschere tries to offset the risk of long/short managers with CTAs in the portfolio.
Some 10% of assets under management are in global macro funds.
This allocation has been increased over the past 12 months from 4% in November 2001. 'We had a feeling after September that a number of macro themes and opportunities were increasing substantially,' says Debusschere.
The Orbis Leveraged (Euro) fund, with $288.58m assets under management, has increased performance by 27.631% over the period. The Orbis Leveraged Fund invests primarily through other Orbis funds in a hedged portfolio of equities that have been selected as the firm believes their share prices significantly understate the intrinsic value of their businesses.
The fund's manager Geoffrey Gardner says: 'We believe that a carefully constructed portfolio of such equities will significantly outperform markets over the long term. To reduce the effect of stock market moves on the portfolio we complement the portfolio with short stock index futures positions.'
He does not attempt to predict short-term market movements. Instead the fund is exposed to decisions in which he has greatest conviction.
'We seek to invest in shares of companies that trade at a significant discount to our assessment of the intrinsic value of the business,' he says. 'We believe the share prices of such companies will eventually appreciate to reflect the intrinsic business value. The timing of the price move is uncertain, but the funds are prepared to be patient and invest in the company with a three to five year investment horizon.'
Investors are often driven by emotion and short-term trends, according to Gardner.
'As a result, many companies are out of favour, misunderstood, and spurned by investors because of excessive pessimism on recent unfavourable developments,' he says. 'The share prices of such companies trade significantly below the long-term intrinsic value of the underlying business. We seek such opportunities and the funds buy into these companies.'
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