Hedge funds likely to attract significant private client inflows in 2010

Hedge fund managers are confident that current market conditions are likely to result in significant flows of capital into alternative asset classes during 2010, as investors look for inflation beating returns at relatively low levels of risk.

According to Kevin Ewer, portfolio manager at Blue Ink Investments - the Sanlam-owned leading manager of fund of hedge funds in South Africa - there are still massive amounts of money sitting in money market funds, which in the current interest rate environment, are not earning sufficient returns. “Also, with the equity markets having run extremely hard in the last few months of 2009, a lot of financial planners are concerned about the risks of a pullback and are looking for alternative options for their clients.”

Ewer however cautions that legislation remains a stumbling block to both further institutional and private client flows. “While significant progress has been made, we are not going to see the big changes that we are hoping for. At least though, the groundwork has been done and the FSB is aware of how and what it wants to do. Now it is just a case of finding the right method of implementation.”

Ewer believes that conditions are favourable for hedge funds to outperform other asset classes in 2010.

“Cash rates are likely to remain low and the massive issuance in the bond market is a major headwind for that asset class. From a long only side in equities, the easy money has been made. The equity market is likely to see increased volatility and to differentiate between quality companies and companies that have simply rallied despite underlying problems. This provides opportunities for hedge fund managers that are good stock pickers, with both the long and short portions of the fund being potential profit centres. Hedge fund managers also have more tools at their disposal to handle more volatile markets than long only funds. We are confident that we will be able to meet our target returns in 2010.”

He adds though that he does not expect hedge fund managers to position their portfolios overly aggressively. “Managers remain keenly aware that liquidity is king in a more volatile environment and that good returns can be made without using much leverage. The extremes of 2008 and 2009 should also have left the successful managers with confidence in the models and methods they use in constructing their portfolios, leaving them well equipped to handle whatever 2010 may throw at them.”

Finally, Ewer believes that 2010 will remain a difficult environment for new entrants into the hedge fund market and believes that we are more likely to see consolidation than a spate of new funds. “However, if 2010 proves to be a good year and capital starts to flow more freely, new entrants are likely to emerge in 2011.