easier.com – Standard & Poor’s Fund Services has issued a warning to investors in funds-of-hedge-funds based on its latest research on the sector.
“Investors may need to think carefully about market conditions despite hedge funds’ general aim for absolute returns at all times,†said Standard & Poor’s fund analyst Randal Goldsmith, “Inaddition to remaining alert as to what might cause a market correction, it may also be important to take a look at whether funds are showing more correlation over time and whether their portfoliosare taking more exposure to equity long-short and macro compared with arbitrage and fixed income related strategies.â€Â
Goldsmith explained that funds-of-hedge-funds generally implement asset allocation changes more slowly than conventional, long-only funds, due to such things as redemption notice periods andlock-ups, noting “So if a fund-of-hedge funds participates in equity market rallies, it is likely to suffer in a sudden correction.â€Â
An unexpected development during the most recent correction was that many fund-of-hedge funds actually fell more than related equity indices. Reasons for this included a general overweighting ofsmall- and mid-cap stocks versus large-caps, exposure to commodities and to emerging market equities. Said Goldsmith “Investors might have been upset by the returns provided by many fund-of-hedgefunds, claiming to be independent of market direction.â€Â
