When comparing the performance of offshore versus onshore hedge funds, it is worth bearing in mind the overall composition of the UCITS Hedge Database in terms of strategy: throughout 2010 there was a strong bias towards the liquid strategies, particularly those enshrined in the Relative Value, Global Macro and Long/Short Equity sub-strategies. Efforts are being made to bring more esoteric hedge fund strategies into the UCITS arena, but it is unlikely that an equivalent picture to the offshore universe will ever emerge.
UCITS hedge funds are forced to provide a higher level of liquidity, and their managers must take this into account when implementing investment ideas. Life is slightly easier if you are trading in highly liquid derivatives markets, or your original offshore fund already sits easily in a UCITS wrapper with no tweaking required. But offshore hedge fund indices will include many illiquid funds that will likely never be represented in the UCITS universe, and when these strategies have a good year, we will not see this powering the numbers of our index series.
Two of the sub-strategies that currently have a meaningful number of underlying funds were able to outpace the master index (represents all the UCITS hedge funds in our database, including those that do not currently contribute to a published sub-strategy index).
Currently the Long/Short Equity sub-index is heavily biased towards European strategies. This is partly because many of the early movers into this space have been European firms, with flagship long/short equity products. In addition, many firms seem to believe that products of this nature will sell better than something more esoteric. They may be right. Certainly, Long/Short Equity has been the best-performing strategy this year in our universe of UCITS hedge funds.
Long/Short Equity is still light on dedicated North America strategies, although the trials and tribulations of North American markets were reflected in other strategies. In addition, while they are now starting to appear, there were not many dedicated emerging markets hedge funds in the UCITS universe at the beginning of this year. We expect that to be rectified over the course of 2011, and hope to be able to launch a dedicated emerging markets index of UCITS funds in the near future.
Click on table to view fullsize versionA year of two halves
2010 has been called a game of two halves by several fund managers: the first half of the year was far more testing for portfolio managers and for systematic funds than the second half, when some strong directional themes emerged. Investors have noted that the first half saw managers tested to produce alpha under difficult conditions, while the second half of the year was more of a beta-riding affair in many markets.
The state of the euro and the ability of authorities both political and monetary to salvage it have concentrated minds throughout the year. The single currency was kinder to the discretionary manager than to the systematic manager in the early part of the year, and one of the big themes has been the way funds in the Macro Systematic sub-strategy took a pounding over the summer months, but then staged a large rally in the autumn, with the index recouping losses from earlier in the year to end December in positive territory.
Confidence in the euro project and in sovereign debt issued by some members of the Eurozone ebbed in the second half of the year, and a declining euro and rising commodities prices emerged as a solid trends. Indeed, more money could probably have been made shorting the euro if it wasn’t being bought by central banks seeking an alternative to the dollar.
Macro Systematic funds that make use of highly liquid, centrally cleared derivatives markets, and that were able to tap into the quantitative-easing bull market that emerged in a number of key commodities markets, have put out some solid numbers in Q3 and Q4.
For funds that traded throughout 2010, however, the key was being able to make money in good times as well as bad. Many managers were caught out by the market correction in May, and this is reflected in the correlated performance of various strategy indexes. Having said that, we have also noted that some of the more famous managers with UCITS products already reporting during this period were able to avoid negative numbers for the month: there is obviously a good reason why they are followed so closely by investors.
In the final quarter of the year, the rally in the dollar caught out some managers, as did the beginnings of China’s moves to curb its own domestic inflation problems. The ongoing obsession with taking the temperature of China’s economy will likely continue to be a major theme for UCITS hedge fund managers in 2011, whether they dabble in commodities or equities. US equity markets had a solid four months of it in the closing third of the year, and hedge funds proved adept at riding a wave that saw the Dow up 11%, the NASDAQ up 19.2%, and gold up 30%. Who needs alpha in that environment?
Overall, there is a growing sense of optimism within the UCITS hedge funds market as we look back on 2010. Most of the funds we track in the database were able to make money in an environment that was at times fairly trying. Given that interest rates and the corresponding risk-free rate of return were so low, this was a year that most UCITS hedge funds were able to beat cash. We wonder whether the same will be true of 2011, although on current form it looks as if interest rates will remain low next year.
UCITS hedge fund managers were capable of managing their risks and their liquidity profiles efficiently, and while they have had to work hard to raise assets, it is notable that the universe as a whole was able to continue to expand its asset base at a fairly consistent rate throughout 2010, with only the predictably slow summer months seeing a flat period for asset growth.
Having said that, the prop desks at the big investment banks have been packing up and many other investors in US financial markets have been withdrawing liquidity. One observer cynically observed this month that hedge funds (along with pension funds and endowments) have started to become one of the primary drivers of returns in US markets, which is not necessarily what they were designed to be!
About the UCITS Hedge Indexes
We have included returns from all funds on the database, daily, weekly and fortnightly dealing, so readers have a complete picture of the performance of the universe we are currently tracking.
As we continue to populate the UCITS Hedge database, we will be launching further strategy indices. We expect to publish more as our underlying database of funds reaches the point where other strategy indices become meaningful. A fuller index methodology is published on our website and provides further detail on fund inclusion and index calculation.
The four strategy indices reported here represent the bulk of the total universe of funds in the database, while the master index tracks all those funds with hedge fund characteristics as defined by our methodology.
In addition, we are also tracking a growing number of absolute return UCITS funds (i.e. with no benchmark index but also no active management of the short book) as part of our data gathering activities, although we will not be publishing an index using this data until the universe becomes more comprehensive.
All our indices are composed of UCITS III compliant hedge funds that are currently reporting to our database. The dominant strategies in the universe are Long/Short Equity, Event Driven and Macro, although we are also now publishing a master index that incorporates the performance of all the funds in the database, apart from absolute return funds and funds of funds.
We publish both equal and asset weighted versions of each strategy index electronically for our database subscribers. In the hard copy editions of The Hedge Fund Journal we are using equal weighted indices.
The indices have a ‘live’ date of 1st January 2010, although performance as published here is to the end of December. Subscribers to our database will receive index performance data as part of their subscription package, and they are also available via our demo account facility.
To register your fund in the UCITS Hedge database, or to arrange a demo account if you are interested in subscribing, please email Stuart Fieldhouse at stuart.fieldhouse@ucitshedgefunds.com
