Funds Hub

The latest update on funds of hedge funds (FoHFs) performance arrives from Fitch Ratings — and it makes for an unsurprisingly sober read.

We perhaps know already that 2008 was the worst year ever for FoHFs, and that cumulative losses reached an all-time high as the year ended with a Madoff-shaped bang. Fitch also raises a fear that managers have shared after imposing redemption restrictions on clients wanting to stash their cash under the proverbial mattress:

The year has witnessed a wave of managers implementing restraints on clients’ access to their assets, thus putting again into question the business and sales model of the industry

More gloomy prose measures the impact from Bernard Madoff’s alleged Ponzi scheme; itself not technically a hedge fund, of course, but those FoHFs that were caught out will force the wider industry to navel gaze its way to a new set of standards:

The whole chain of parties involved in HF management, administration and distribution need to rethink the monitoring of conflicts of interest, governance, independence of third-party service providers and ethics.

Fitch though does not deny itself a glimpse of the brave new world beyond the sackcloth and ashes. We’re urged to consider convertible bonds (CBs) as the cherry pick for 2009; canny managers and fund of funds with the capacity and skills to pick the good from the bad should make hay among the “obvious opportunities.”

The ratings agency makes a strong case: hedge funds now dominate the CB market following the demise of Lehman and the exit from the scene of main market makers and institututional investors; valuations meanwhile have been laid low by a credit crisis which overwhelmed the entire industry of CBs, whether long only or arbitrage.

But this strikes a familiar chord.

Much has been made of crowded trades in the hedge fund industry which slimmed down returns and allowed correlation to bleed into unexpected areas. Some are already calling for caution as the “hype” builds around corporate bonds, and while value calls remain tough, wholehearted endorsements like the above from Fitch highlight the potential for the crowds to gather again and draw breath to blow another bubble.