Mariya Domina Repiquet, a candidate for the Master of Science in international finance at the University of Strasbourg, has written a paper analyzing hedge fund investment styles and strategies just after the global financial crisis, that is, in the period 2009-10.
The work combines a trip down memory lane (important memories, an important lane) and a discussion of issues of classification.
Repiquet took on a three-fold problem: first, the hedge fund industry’s ability to generate absolute returns; second, the post-crisis trends in the industry; third, the advantages and disadvantages of what he saw as the six main investment strategies of the industry. The six strategies he has in mind ae: equity market neutral (here he includes directional long/short as well as strictly market neutral approaches); arbitrage and relative value; event-driven; emerging markets; macro investing; and managed futures.
Working through the List
Of the first of the six listed strategies, market neutral broadly understood is Repiquet says, “remains a preferred type of hedge funds in [the] post-crisis financial world due to the flexibility in its investment style, ability of the managers to eliminate certain risks by offering ‘double alpha,’ and increased liquidity.”
Of the second, he notes that there are those who are dubious about it “from the perspective [of] how safe particular fixed-income instruments are,” notably concerning the safety of the bonds of governments themselves dealing with fiscal crises.
Repiquet breaks event-driven funds down into distressed debt, merger arb, and activist funds. The specific case study in this section of the report is JLP Credit Opportunity Cayman Fund Ltd., which is employs a distressed securities strategy.
Repiquet concludes that “overall, event-driven hedge funds have shown positive performance” and he attributes this to the distressed securities field specifically. The point is that pickings were especially rich among distressed assets just after crisis. That of course has always been part of the pitch of such funds: distressed securities funds get their choice of a range of assets when times are bad – merger arb funds see lots of opportunities when times are booming, which is when the psychology is right for merging – between the two of them an investor can be prepared for the whole of the business cycle.
Although as noted above Repiquet formally includes activist funds also in this category, he has nothing specific to say about them.
Emerging markets funds, he proceeds to tell us in the next chapter, “are the preferred choice for those investors who require high returns and are not afraid of taking high risks.” Several characteristics distinguish emerging from developed market nations. The former sometimes undergo political and economic reforms on which outsiders can sensibly place a bet, they have the most room for growth, and “they play an important role in the international political arena.”
Repiquet observes, though, that one often can’t short sell equities in EM nations, due to the concern of such countries that short selling could destabilize their economy.
By way of case study, Repiquet briefly discusses Ping Exceptional Trade Fund Offshore Ltd, a fund incorporated in the Cayman Islands with a global focus.
This brings us to the fifth of Repiquet’s strategies, macro investing, a top down approach to a portfolio. In his hypothetical example, this would involve the detection by a manager of an overvaluation of a particular country’s currency based for on such data as real exchange rates, net exports, and current account deficits. This strategy contains within itself the “highest level of diversification,” which is its appeal.
Indeed, Repiquet seems to include multi-strategy funds within the umbrella of global macro.
Finally–managed futures
Repiquet characterizes these as trend following strategies, and observes that they are as such “vulnerable to a sudden breakdown in the market trend or a period of range-bound markets.”
Backing off of the trees and looking again at the forest, Repiquet observed that hedge funds can “provide a unique source of absolute return for the investors,” that arbitrage, event-driven, and macro investing are the most promising of these, and that key to the success of the industry is the ability of its managers to value positions and to adjust quickly to movements in the markets.
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