Start your alpha engines, “the race is on”
Mar 23rd, 2008 | Filed under: 130/30In a research report published last month, Merrill Lynch’s European equity research group pronounced that the asset management “race is one” as hedge funds and traditional asset managers compete in a “converged” industry where the lines between long-only, private equity, hedge funds and other alternative asset classes are blurred.
Hedge Funds “outperformed by a very handy margin”
Of course, this convergence presupposes that these alternative asset classes actually represent something of value. And after racking up volatile results over the past 6 months, hedge funds, for one, are raising some eyebrows. Still, Merrill argues that recent performance does little to diminish the value of hedge funds:
“We have seen a range of articles spreading doom and gloom about hedge funds in 2008 so far. As is often the case, hedge funds, we are told, have been ‘melting down’, ‘blowing up’ and in general misbehaving. Certainly, nobody would suggest that January ‘08 will be remembered as a vintage month for the industry.
“However, taking the HFRX as a decent representation of the industry, you find that the industry has outperformed equities by a very handy margin…
“We continue to believe that those who argue that the industry should be aiming to provide strong positive, absolute returns, without any loss-making months, are barking very loudly up the wrong treeWe reckon that it is months like January which show why people should own hedge funds. If you only look at good months, equities win hands down (if you know how to identify good months in advance, do drop us a line).”
“talk of a ‘bubble’ presupposes excess capital allocation. Hedge fund performance belies any talk of bubbles, we think, simply because it is, at the macro level, so consistent.”
This last point bears some reinforcement, we believe, because “bubbles” occur when investors bid up prices in a relatively short amount of time. As this report points out, the percentage of assets managed by hedge funds has grown rather slowly, they continue to represent less than 1.5% of global “mainstream” assets and their net asset values are based on underlying securities, not a subjective premium like, for example, tech stocks (see related posting).
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