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Low volatility stifles funds of hedge funds

Lower levels of volatility in equity markets hit returns for fund of hedge fund managers in the first half of the year.

Standard & Poor’s says while some funds of hedge funds achieve returns independent of market conditions, performance has generally been affected by factors such as low interest rates, lack of volatility and trendless markets.

According to S&P, long/ short equity and global macro strategies have been worst hit while event-driven strategies, such as merger arbitrage, have held up better.

Furthermore, as increasing numbers of managers identify and chase the same opportunities, the inefficiences which make it possible to achieve higher returns are being eroded.

S&P says funds of hedge funds have done a good job in producing consistent returns year by year but performance can appear weaker on a month-by-month basis in response to market factors.

Associate director, funds of hedge funds, Randal Goldsmith says: “Funds of hedge funds are designed to be independent but are not necessarily completely independent. We have seen that the returns produced five or 10 years ago tended to be better than those produced over the last couple of years. They do benefit from interest rates being higher rather than lower and they may be affected by factors such as general volatility and inflation.

“However, it is not a question of markets going up and down but whether they are moving about a lot. Convertible arbitrage strategies require movement and have had a tough time while markets have been quiet.”

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