Hedge funds upgraded despite slowing market

Four funds have been upgraded and there have been no downgrades in Lonsec’s latest hedge fund sector review, which excludes long/short equity funds.

Lonsec senior investment analyst Richard Everingham said there was a strong skew towards higher ratings in the hedge fund sector compared with other asset classes the researcher reviews due to the small size of the market.

“Usually in most sector reviews we do we’ll have a downgrade or two. In fact, it’s possibly more usual to have more downgrades than upgrades but this was different to most cycles,” he said.

Lonsec upgraded the ratings on the CFS Global Diversified Strategies Fund to ‘recommended’, while the HFA Diversified Investments Fund, Rubicon M&A Fund, and the GSJBWere Global Alpha Fund were bumped up to a ‘highly recommended’ rating.

Rated for the first time were the GSJBWere Multi Strategy Fund, the UBS Global Alpha Strategies Fund, and the Select Gottex Market Neutral Fund, which achieved ‘recommended’ ratings. The Challenger FM Global Hedge Fund also made its ratings debut with a rating of ‘investment grade’.

While HFA Diversified Investments Fund was the only candidate in the hedge fund of funds sector to receive a ‘highly recommended’ rating, all four funds in the single manager hedge fund segment — the BGI Global Markets Fund, the Basis Aust-Rim Opportunity Fund, the Rubicon M&A Fund, and the GSJBWere Global Alpha Fund — achieved ‘highly recommended’ ratings.

Five other funds received ‘recommended’ ratings, and two received ‘investment grade’ ratings.

Everingham said several industry themes and trends had also emerged from the review, including massive growth in hedge fund assets driven by institutional demand and the institutionalisation of many hedge fund of fund managers driven by the desire to attract institutional money.

He said there were also early signs that the growth in hedge fund assets has slowed.

“There are a couple of reasons for that. I think equity markets have now done well for the last couple of years so that perception is beginning to stick in terms of equities being a favourable asset class for growth but also … the relative value strategy section of the industry did have some tough months in the middle of the year mainly related to General Motors in the US.

“A number of hedge funds produced some poor returns or even closed and returned their money around that period and that acted as a bit of a break on fund inflows around that period,” he said.

Everingham said the next year was unlikely to produce the high levels of inflows that have been seen over the last two years.