The claim that Funds Of Hedge Funds (FOHFs) are able to make money in any market conditions has not proved to be correct, according to S&P Capital IQ Fund Research.
“In theory, FOHFs are supposed to make money in all market conditions; in reality their performance tends to suffer when equity markets are falling, albeit to a lesser degree,” says fund analyst and sector head Randal Goldsmith, in his latest review of FOHFs.
In light of this and given the increasing dependence of funds-of-hedge-funds (FOHFs) on market conditions, S&P Capital IQ Fund Research says it plans to pay more attention to their returns relative to comparable peers and less to performance versus absolute return targets.
“If we had continued to focus on performance versus absolute return targets, over 90% of the peer group would be ungradable,” explains Goldsmith.
Goldsmith adds that FOHFs have also struggled when securities markets are not fundamentally driven, such as during periods of liquidity withdrawal or when politics dominate, as they did last year. During 2011, FOHFs experienced a slightly bigger loss than equities (-5.7% on average versus the S&P Global 1200 return of -5.1%).
While the decision to adapt the analytical process to place more emphasis on comparative returns was simple to make, explains Goldsmith, the process of comparing FOHFs against others with a similar strategy is not straightforward due to the diversity within the sector as a whole and then even within broad strategy groupings.
Goldsmith offers some examples to show how the analysts have been looking at the funds: “For multi-strategy funds, we separate out more aggressive funds such as Permal Investment Holdings and Thames River Warrior from lower volatility multi-strategy FOHFs such as Stenham Universal, HDF Multi-Strategies and the Absolute Fund. We also look at the performance of directional FOHFs against long-only equity indices. In addition, we break up funds of equity hedge funds into regional sub-groups.”
S&P Capital IQ's latest review of FOHFs is available at http://bit.ly/JPsuYH.
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