In Hedge Fund Shakeout, Managed Futures Soar
'Agnostic on the economy,' funds see rapidly growing investor demand
March 30, 2009
While the hedge fund industry took a beating in 2008, it may also have been the year that managed futures funds came into their own. Now technology providers are rushing to help the funds deal with their growth.
The average hedge fund was down more than 19 percent last year, according to the Credit Suisse/Tremont Hedge Fund Index, as many were forced to raise cash rapidly to meet redemptions, or close down entirely. And assets could tumble 50 percent before the shakeout is over, say some forecasters.
But managed futures funds rose, on average, 18.3 percent last year. Of the nine other major hedge fund classes tracked by the Credit Suisse/Tremont index only those with a dedicated short bias had a positive year, up 14.9 percent. All others saw whopping declines, with emerging market funds off 30.4 percent and those employing equity market neutral strategies down 40.3 percent.
Managed futures funds' positive performance in a disastrous environment has not gone unnoticed by investors. According to a Morgan Stanley report, assets climbed from $170 billion in 2006 to $234 billion last year.
Uncorrelated to Market
Kenneth Webster, president and COO of Boca Raton, Fla.-based John W Henry & Co., a managed futures adviser that started up in 1982, says he is not surprised by the funds' sterling performance. Managed futures--which he defines as the tracking of a diverse set of underlying instruments that trade on an exchange in the form of a futures contract--have historically provided results that are not correlated to the stock market, he says.
"There were sustained moves last year, a lot of them of historic proportions," notes Webster. "In times of crisis, markets correlate. Everything seems to be moving in sync. We look for a trend behavior that manifests itself in the prices of these futures contracts. We saw historic moves in the agricultural and energy markets" in both directions.
Webster says that his firm trades in 80 markets--two of which provided negative returns last year. His main program was up 91 percent last year, he says, while the worst-performing gained 40 percent.
Webster says his firm's service providers include electronic trading firms, pricing vendors and attorneys. There are also extensive compliance requirements in the managed futures sector, since the instruments are heavily regulated by the Commodity Futures Trading Commission and National Futures Association, the industry's self-regulatory organization.
In volatile and uncertain markets, regulation has been a plus. "Unlike hedge funds," he says, "we are fully regulated, we trade only in liquid instruments and we provide transparency to investors."
Salem Abraham, president and owner of Abraham Trading Co. in Canadian, Tex., which trades in 60 markets, has a slightly different take on managed futures' success. "People in managed futures need market movement to make money," he says. "Everyone in managed futures tries to anticipate price movement in all these different markets. Most investment funds are long on the economy. In managed futures, by contrast, we are agnostic on the economy. We just need movement."
Abraham Trading relies on fund administrators, auditors, attorneys, custodian banks, brokers, quote services and news suppliers in its operations. As managed futures firms prosper, "clearly, there will be opportunities for service providers," notes Abraham. For vendors looking to cater to the funds, "the challenge is that most managed futures firms already have a lot of these services in place."
