Although there are storm clouds on the horizon, including the Eurozone crisis, volatile markets, and a hangover from mediocre performance in 2011, hedge funds may have less to fear in 2012 says Donald A. Steinbrugge in a guest article for Opalesque.
Steinbrugge is Managing Partner of Agecroft Partners, a global consulting and third party marketing firm for hedge funds based in Richmond, VA.
When he looks back at the turmoil experienced by the industry during the 2008 crisis, he sees negative performance, heavy redemptions and a near-complete seizing of inflows. But based on Agecroft Partners’ conversations with hundreds of hedge fund investors, he sees a very different picture for 2012.
While it’s true that the volatility in the markets has made many investors nervous, there still hasn’t been a dramatic change in investor allocations to hedge funds. And even if there were a more significant drop in the markets, hedge fund in-flows would hold up better than in 2008. Why?
First, because the investor base for hedge funds is much different than in 2008. Today, it’s dominated by institutional investors who have much more of a long-term perspective to investing. Pension funds, for instance, have been responsible for significant inflows into hedge funds in recent years. This trend could increase as these funds need to generate a return typically in the 7.5% to 8% range, which is difficult when fixed income investments are earning around 3%.
What’s more, other options are limited. Money market funds are yielding close to zero and generating a negative real return. The 10-year US treasury is yielding approximately 2% and could sustain a large market value decline if interest rates rise.
Steinbrugge says endowments and foundations are less likely to rush to the exits now, as well, because they have repositioned their portfolios to better withstand “liquidity events”. These liquidity events were primarily caused by their exposure to private equity in 2008, which caused significant issues when capital calls increased.
Second, hedge fund managers are much less leveraged today versus 2008. Many funds that ratcheted up the leverage back then are either out of business or have been forced to dial back. Less leverage today should help funds’ performance in a down market and further reduce investor redemptions.
Third, the industry is more transparent, and investor due diligence has increased in the wake of the Madoff scandal. So there is less chance that investors’ confidence will be spooked by a similar fraud that triggers redemptions.
You can read Steinbrugge’s other reasons for why 2012 will not be as harsh a year on hedge funds, even if there is a market decline, by checking out the Opalesque article.