The Credit Suisse/Tremont Hedge Fund Index has recorded a major loss for the hedge fund industry in 2008, finishing down on 19.07 per cent. The latest results from the Index indicated that hedge funds lost 0.03 per cent in December “despite a late month equity rally”, according to Oliver Schupp, president, Credit Suisse Index Co.
The winners at the end of a difficult year were managed futures, which brought in positive returns of 18.33 per cent for 2008, and dedicated short bias funds, which generated 14.87 per cent.
But Select Asset Management’s chief investment officer Dominic McCormick cautioned against thinking high returns in managed futures would necessarily continue because they were one of few profitable areas last year.
McCormick said managed futures were a very good diversifier and was not cautioning against using them entirely. Rather, McCormick said investors “shouldn’t be buying managed futures effectively in a performance chasing approach and just buying, and perhaps putting too much in, just because they were one of the few areas that did well last year”.
“Because a lot of managed futures funds are longer-term or medium-term trend followers, they tend to do well when there are very pronounced trends, whether those trends are up-trends or down-trends, whether they’re in equity markets or commodities or currencies,” McCormick said. “Now the last year was a year of very pronounced trends, which helped them.”
McCormick argued there is greater risk for managed futures in choppy market environments because they “tend to get whipsawed in positions” and not perform as well. He said equities tend to do better than managed futures in a pronounced bull market.
“[It] obviously depends on what’s happening in other areas, other trends in interest rates and commodities. Because even if there is a strong up-trend in equities, if you’ve got choppy conditions in other markets, which we did have in currencies and interest rates for extended parts of the bull market, then that can be a difficult environment for them,” McCormick said.
“If people are projecting the same sort of year that we had last year, then I’d suggest that managed futures could have another good year. But if you’re inclined to think, as probably we are, that this is more likely to be a choppy year, that’s not necessarily the best environment for managed futures.”
McCormick added that managed futures are often stripped out and not seen strictly as hedge funds, but rather as part of a broader hedge fund universe. “We look at our hedge fund exposures and our managed funds exposures as two quite separate things,” he said.
