With more and more money chasing fewer investment opportunities the returns from long/short equity f...
With more and more money chasing fewer investment opportunities the returns from long/short equity funds have plenty of scope to reduce.
One possible solution is to look at global funds. These are relatively new having some $39bn invested in 1990, rising to just over $1 trillion in assets today. Over the same time the proportion invested in long/short equity has risen from 7% to 44%.
The process is perhaps best explained with an example. Around the middle of last year, we noted an imbalance in global energy markets, with strong demand growth not being matched by increases in supply. Most significant was the lack of new refinery capacity. In fact, no new refineries had been built in the US since the 1970s. Having considered a number of alternatives, we bought ConocoPhillips. This firm has subsequently performed extremely well for us. However, because we manage a global portfolio, we were able to extend the idea. For instance, we have also been long Nippon Oil of Japan. We were able to extend the concept of energy shortages into other commodities too, notably coal. Here we identified Excel Coal and BHP Billiton, with their extensive Australian coal mining operations, as potential beneficiaries of demand from China.
You can see from the example above how one idea can be widely applied around the world. It is in this area that we believe global managers can leverage information asymmetry to best effect. And we believe the approach can be extended to the short side of a fund. In our view, finding high-conviction ideas for shorting can be more difficult than finding long ideas for regional hedge fund managers. The global fund manager has a far larger opportunity set, and can therefore be more selective in his short positions.
An example of this was US printer manufacturer Lexmark. This firm has a global reach and competes with Hewlett Packard to be the world's number one. In July, Lexmark released poor numbers, blaming weaker demand and pricing pressures for its disappointing results. Our global remit again allowed us to benefit from this news. We noted that Seiko Epson of Japan was due to release its results, and went short the stock. The firm is a competitor to Lexmark, but has a weaker franchise and we expected it to lose market share and as well as facing tighter margins. As expected, the firm produced terrible results, benefiting our position.
Investing in global equities is not straightforward, requiring specialist analytical, fund management and dealing skills. It is even more difficult in the context of a long/short hedge fund. The research required is time-consuming and labour intensive, and generally only available to managers with considerable resource.
But having a global analytical capability is not an end to the problem. Having carried out the research, the job of collating and interpreting the results is also problematic given the volume of material available.
Global hedge fund assets now stand at $1 trillion.
It is becoming harder to generate high returns from hedge funds.
Managers need to seek out new sources of return to compensate.
Despite improved risk appetite
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