Volatility gets better of hedge funds

The idea of hedge funds may well be to predict market movements ahead of time and act swiftly to produce the best possible returns in absolute terms, but this genre of funds don't seem to have been spared by the merciless markets this time around.

Last month proved to be the worst-ever for hedge funds, with the key MSCI Hedge Invest Index shedding 1.27 per cent, the biggest monthly fall since June 2003 when the index was constituted. Net inflows stood at $1 million.

Since mid-July 2003, the index, which takes into account the overall structure and composition of different categories of hedge funds to depict the characteristics of the overall hedge fund universe, has produced absolute returns of 15.54 per cent.

Andrew Holland, executive vice-president (research), DSP Merrill Lynch, said hedge funds had got a lot of new money and it was a tough task to deploy them effectively. That seemed to be one of the reasons for their underperformance.

The largest positive contribution during the month came from arbitrage funds adding 4 basis points, while the largest negative contribution came from long bias funds with a decline of 56 basis points.

This is in line with the view that arbitrage funds fared well as markets across the world were infested with mispricing opportunities through May and June following the sudden change in sentiment and decline in trading volumes. Long-biased funds were the most hit owing to the market meltdown with the MSCI Hedge Invest Long Bias Index down 2.62 per cent during the month.

Back home, the decline in stock prices does not seem to be dampening the spirit of hedge fund managers.

"Long-term capital keeps coming in bits and pieces in long-bias funds and we keep getting that money. Though we don't have target index level, we continue to be bullish on specific themes such as consumption and infrastructure" said Shiv Puri, managing director, Voyager Investment Advisors, a hedge fund investing in India.

Hedge funds seem to have done worse than even most regular market indices. For instance, the MSCI Emerging Market Fund index was down only 0.46 per cent during the month, while MSCI BRIC, where long biased hedge fund have been overweight, was up 3.22 per cent.

Respective country indices of Brazil, Russia, India and China were also in the positive territory. The MSCI World equity index lost 0.17 per cent, while the MSCI US was down a meager 0.014 per cent during the month.

On the debt side, the MSCI World Sovereign Debt index was down 1 per cent, while the sovereign debt index of Japan was down 2.20 per cent.

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