Money managers under the microscope
Insight director of UK equities Andy Cawker, manager of a long-short Ucits III fund, tells me he has been changing the way his fund hedges its market exposure as market conditions change.
His Absolute Insight UK Equity Market Neutral fund, which uses pairs trades to produce a largely market neutral portfolio, has shifted from hedging mostly against the index two years ago to now hedging predominantly against individual stocks.
Why? And why does it matter?
Well, it’s a good reflection of market conditions.
In summer of 2007, just before the onset of the subprime mortgage crisis, M&A activity, and more importantly M&A rumours, were at a peak. It seemed like almost any company that was trading poorly could become a target for private equity funds — then at the height of their power — and the share price could actually rise.
So hedging against individual stocks is a bit risky. You could rightly identify that a company will trade poorly yet lose out on the short. So hedging against the index was the path Cawker took.
Data from Hedge Fund Research shows they returned 0.39 percent in January, having lost 18.73 percent in 2008, although they gained 0.21 percent in December.
The start of a revival in hedge fund returns? Well, maybe, and maybe not.
One explanation is that returns are just bouncing back after losses were exacerbated by redemptions late last year.