Hedge Funds & Bear Markets
Hedge Funds During Bull and Bear Markets
Here is a short post by Veryan on how hedge funds perform in bear and bull markets:
Risk management Rule No.1: if it can happen then it will happen. Hope for the best but plan for the worst. Recent events have provided good returns for some hedge funds, hard times for other hedge funds but harsher times for long only. Skilled absolute return managers don't make money every month but they do have milder and shorter duration drawdowns than index funds. I wrote back in January that the Dow and Nikkei would likely fall below 10,000 this year as a result of the credit crisis and owning stock index option puts has indeed been the top performing strategy this year. But those were just lucky guesses. I can't time markets so personally I'll be focusing on funds that can preserve capital, control drawdowns and generate alpha no matter what happens.
Flight to quality? Some real hedge funds are positive for the year even when the aggregate returns for the industry are negative. Performance dispersion is enormous in such a diverse universe. Several strategies have not been affected by prime brokers imploding, changes in short selling rules or the leverage lockdown. The best managed futures CTAs, global macro and options traders have been generating absolute returns throughout the equity and credit mayhem. Strategy diversification is so important since forecasting is difficult. Transitions from one market regime to another often requires a financial revolution.
Crash or capitulation? Dislocated markets create inefficiencies for traders with the rare expertise to exploit them. For anyone predicting a Great Depression, it is worth recalling that hedge fund managers Benjamin Graham, John Maynard Keynes, Karl Karsten, Philip Fisher and Gerald Loeb performed well in the 1930s. And when the 1960s boom ended, even the Buffett Partnership closed down despite good performance but Warren has extracted plenty of alpha subsequently. Similar to some other prominent multistrategy hedge funds, Berkshire Hathaway (BRK.A) is down over 25% this year but I have no doubt managers with genuine edges will be back at high water marks before equity benchmarks. Sure there are issues affecting particular strategies but the best managers are able to adapt, learn and ultimately thrive in changed conditions. Read more...