Hedge Funds in 2011, not 2008

Terry Flanagan

The Dow Jones Industrial Average has made 300 point moves seven times during the month of August, plagued by a single day 650 point drop at the beginning of the month’s trading. Mutual funds and hedge funds awaited the ripple effects from the equities sell off, fearing the worst of 2008 redemption levels.

Yet, a new era of hedge funds, prizing liquidity, transparency and risk management have kept funds intact this time around.

“Trends developing within the hedge fund investor community based on the recent sell off in the equity market and the increase in volatility, are very different than what was experienced at the end of 2008,” said Don Steinbrugge, managing member of Agecroft Partners, a third party hedge fund marketing firm.

Steinbrugge states that despite August’s volatility, the S&P 500 as of August 19, was only down roughly 10.5 percent year to date, which contrasts the 40 percent drop in 2008. Only approximately five to ten percent of investors decided to stay “on hold” during the short term volatility period, nowhere near 2008 levels where investors were not simply on hold, but redeeming.

However, should another 40 percent drop in the equities market occur, Steinbrugge is confident that a repeat of 2008 is not imminent, mainly because of the current hedge fund investor base, lack of leverage in the system and vastly different strategies employed.

“The make-up of the hedge fund investor base is very different from 2008 and is dominated by institutional investors who are much more long term oriented and stable,” said Steinbrugge, citing pensions, who strive to place money into hedge funds while broad markets decline as a means of “by enhancing returns and reducing downside volatility.”

Also, in 2008, funds that were reliant on heavy leverage had a rude awakening with the failure of banks, which collapsed or significantly reduced leverage for fund of funds, according to Stein brugge.

High levels of liquidity and risk management are top priorities for investors, exemplified in particular strategies, noted Steinbrugge.

“Many investors are looking for strategies that provide diversification benefits, downside protection or a focus on less efficient areas of the market. We will see continued strong demand for global macro funds and CTAs because of their historically low correlation to long-only benchmarks.”


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