No clear consensus emerging on star strategy performance

What strategy will be the top performer in 2009?

While many would expect global macro to be the strategy of choice, it is clear investors and hedge fund managers are not in agreement. A wide variety of strategies, depending on perspective and analysis of the current and future economic conditions, have led to a variety of strategies being tipped as the star performers for 2009.

Most have an eye on the effect wide-scale government intervention as well as varying degrees of country-specific recessionary impact will have on individual sectors and on strategies. All agree there are opportunities for the taking if managers are bold and there is enough liquidity at fund level and in the system in general to take advantage of the chances the markets present. Although there is no agreement, the variety of strategies being chosen is in itself a healthy sign that the hedge fund industry offers variety as well as the possibility of absolute returns in any market.

Philip Pearson, Aviva Investors
Choosing the right manager is always the most important decision an investor can make, as there is clear evidence the dispersion of returns between managers is greater than that of returns between strategies. However, 2008 saw a large dispersion between returns in hedge fund strategies with global macro thriving. Strategies that profit from high levels of volatility and have a broad investment remit, such as macro, should continue to do well in 2009. The recession and policy actions by governments and central banks should ensure volatility remains elevated for some time. Improvement in the liquidity provided to hedge funds, coupled with greater use of exchange-traded instruments, is allowing managers to take a bigger bite out of the existing advantages. The withdrawal of capital from markets by hedge funds and prop desks means popular trades, particularly arbitrage, are less crowded. We see global macro remaining a key driver of returns in 2009 and beyond, although more generally those strategies designed to profit from the most severe price dislocations created by the crisis, such as convertible arbitrage and credit relative value, should also perform well.

Andy Sowerby, Martin Currie Investment Management
The extreme economic and market dislocations of the past year have created a fertile environment for stock-picking strategies. For example, as dedicated equity long/short specialists, we are finding opportunities to make significant returns as the market starts to discriminate between the likely winners and losers emerging from the crisis. Every industry and sub-sector is going through a period of transition, a once-in-a-generation shift. Leadership is changing and business models are being redrawn - this creates opportunities that we can take advantage of. We are finding many opportunities to make money. In the long book the market share and profit opportunities available to the winners are material. On the short side, poor-quality businesses will be punished, business models will be tested and many companies will disappear. With the relative attractiveness of equities at multi-year highs and cash sitting on the sidelines, we believe this is the time to increase allocations to long/short equity strategies. We would point to strategies focused on Asia and thematic plays in the global resources sector as being among the likely winners in 2009.

Sheldon MacDonald, Nedgroup Investments
In the panic of 2008, fundamentals were ignored as banks, hedge funds and other investors sought to de-leverage at all costs. Other factors, such as the short-selling bans imposed in various jurisdictions, further added to the confusion. In hedge funds the strategy most impacted by this was convertible bond arbitrage. The inability to hedge equity exposure while markets were falling, compounded by a massive dislocation between credit spreads and CDS prices (with which an arbitrageur would seek to hedge credit exposures), at a time when leverage providers were clamouring to be repaid, all contributed to massive declines for this strategy in the latter part of 2008. The HFRX Convertible Arbitrage Index fell 58% for the year. This year, the return from the brink of chaos has seen a recovery in the strategy but it is still less than half the level it was at the start of 2008. As fundamental relationships re-couple, liquidity returns, and bid-offer spreads normalise, this strategy will continue its recovery. With volatility set to persist (given the conflicting signals mentioned above), convertible arbitrage funds should be able to extract significant value through the rest of 2009.

Enio Shinohara, Claritas Investments
Macro. I am not referring to general global macro strategy that made Soros, Bacon and Robertson celebrities in the 90s but to macro managers with a specific focus, either geographically or a particular market niche. The rationale behind this preference is that even though macro managers need to have a broad understanding of what is going on in the world, I believe that they can add more value (ie, make more money) being specialised in certain regions or asset classes. I also like the fact that macro is a strategy that offers huge operational leverage. Macro managers can handle big pools of capital with a small and skilful team of investment professionals. On top of that, macro managers do not need leverage to make money (taking directional risks) and do not need to trade illiquid assets. Finally, I do have a strong preference for smaller macro managers with whom we can establish a very constructive dialogue. More recently we have identified very talented managers starting in Asia and Latin America, the two regions where we have deep knowledge and expertise.

Harry Wulfsohn, Stenham
We believe the global macro strategy will be one of the top performers of 2009. Our experience over the last 20 years has shown that in the immediate period after a crisis, good hedge funds have delivered exceptional returns. Given the extent of this crisis we believe that certain more-liquid strategies will deliver excellent returns and because of the size of the opportunities, deliver these returns with less risk. The significant withdrawal of capital from the industry has left a sector with fewer participants and a much higher concentration of the brightest investment talent looking to capitalise on market dislocations which are easier to identify and less crowded to trade. We are confident that global macro managers are best positioned to capitalise on this environment.

Stephen Rothwell, Argo Capital Management
We expect emerging markets to be a top performer this year. In 2008 the global re-pricing of risk coupled with the perception that some emerging markets were likely to suffer from the credit crunch created a large pool of stressed/distressed securities that were trading at levels that did not reflect their fundamentals. While both equities and credit have recently had a good run, there are concerns that this equity rally may be reversed by earnings reports. We think emerging market bond markets look more robust with fundamentally sound corporate and sovereign issue still offering attractive yields and further scope for spread compression. Good-quality senior unsecured bonds issued by companies that are willing to repay their debt have been trading at deeply discounted prices and high yields, making them attractive investment opportunities. Emerging economies are better placed to weather the crisis with better entrenched fiscal discipline, flexible currencies and relatively good balance of payment positions. The IMF is forecasting greater growth in the developing world relative to developed markets.

Basil Williams, Concordia Advisors
In evaluating strategies managers must consider risk and reward in the context of the differing liquidity inherent in various investment strategies and structures. In 2008 a combination of economic and technical illiquidity affected a broad swathe of hedge fund strategies. Such illiquidity creates great opportunity for investment provided you are not forced to raise capital during such periods. At times like these economic outcomes are extremely difficult to forecast so relative value strategies offer the most compelling risk-adjusted returns. An optimal portfolio solution combines strategies with low, medium and high market liquidity. Permanent capital should be allocated to the least-liquid situations to capture generous risk premiums. The balance of funds should be deployed in high- and moderate-liquidity strategies. As risk capital returns, the illiquidity premia will narrow and assets should be reallocated. Periods of market illiquidity create great windows of investment choice for those that are properly positioned, in advance, to seize the opportunity. Today is one of those times.

Anthony Limbrick, Pure Capital
The introduction of monetary printing presses and fiscal stimulus introduces inflationary forces which effectively mutualise and extend through time losses focused among a narrow group of debt and equity holders and distributes or socialises the losses across all holders and earners of flat currency. There is much pontification at present on whether the inflationary pressures can be contained. Like the alchemy of the structured credit era, this assumes some sort of financial magic. Simple physical laws will not be broken. Pressures will not be contained. Any currency not backed by hard assets will fall in value in real terms. This is starting to manifest as the erosion of sovereign confidence in the US dollar as a reserve currency. Those looking to preserve the value of purchasing power (the real measure of a currency's value) are now looking to hard assets such as commodities and precious metals as a store of this purchasing power. We believe enhanced commodity indexation investment strategies will be the winners over the next year, and probably over the next 10 years.

Corey Ribotsky, The NIR Group
Besides the dominant themes for the first two quarters of 2009, we are excited about the structured equity marketplace. Year to date (as of the end of April), we see convertible arbitrage up 17.90%, according to HFRI, and emerging markets and energy and basic materials outperforming other strategies. However, as we approach the second half of the year it will be a different story. The VIX has gone from 80 to 30 since November 2008. With a lot of the volatility easing out of the market, many of these big returns could be dampened for the remainder of 2009. We think niche strategies that are highly liquid and are not purely dependent on beta of the marketplace are best positioned to take advantage of the market. We believe this is the best environment for structured equity that we have seen in almost 15 years. We have seen some of the largest banks do similar transactions to repair their tangible book and believe those acting as principals in these transactions can perform well in this environment. Most notably Bank of America recently raised over $13 billion in a similar structure.