A couple of trends have been developing in the hedge fund space that are worth noting. It seems that institutional investors (and fund of funds managers) continue to support the so-called "market neutral" strategies. Typically these funds will run a leveraged portfolio on a gross basis but try to neutralize it via long/short stocks or stock indices. They tend to use various beta weighted measurements to determine how stocks will respond to market movements in order to construct what they view as a "neutral" book. It becomes an "outperformance" game. Given how equity markets have behaved in recent years with historical beta assumptions often breaking dawn, it's not surprising that these funds have not done well recently.
However they've done better than other hedge funds in 2011, which apparently makes them interesting to investors. Some institutions are viewing this group of funds as having low (or no) correlation to the overall equity markets or the hedge fund space in general. It's not clear if this is entirely true, but it helps pension managers sleep better at night. So these funds have been proliferating in spite of poor performance.
|Number of Surviving Market Neutral Funds, Annually, 2000 - 2012 (source: Credit Suisse)|
On the other hand the so-called "Quantitative" (Quant) directional strategies (with Renaissance Technologies being the most famous) have been on a decline. Many investors do not believe these strategies are sustainable, as more computer-driven funds would pile into the same trades, distorting markets. Over the past 5 years Quant funds are still down on average (though returns have improved this year). With rising risks to changes in algorithmic trading rules that could negatively impact these strategies, many institutional investors are walking away.
|Number of Surviving Quant Funds, Annually, 1995 - 2012 (source: Credit Suisse)|