London - The new year should bring moderate returns for funds of hedge funds, with the most money to be made by investing in emerging markets and by anticipating trends in futures markets, a Reuters poll showed.
The Reuters survey of 11 funds of hedge funds, which together manage some $52.7 billion, forecast slightly below average to average returns in the next six months, roughly unchanged from the expectations in the previous survey in October.
Hedge funds invest in a range of different assets and should in theory make money even in a falling market as they can borrow assets they don't own to sell short.
Funds of hedge funds spread their money between hedge fund strategies to minimise risk. The survey showed them expecting particularly good returns from anticipating futures market trends.
"If stability is maintained, then we can anticipate positive but modest returns in all the main strategies," Florent Salmon at Oxford Funds said.
"Managed futures and global macro may experience a...rebound if the currently slightly stronger trends -- i.e. currency markets -- continue to pick up in momentum," Kris De Souter at Dexia Asset Management said.
The global macro strategy, which involves making bets on macro-economic directions and spotting trends in the currency and commodity futures markets, was forecast to give above average returns in the first six months of 2005.
“Trends appearing in FX rates, especially in Asia versus the U.S. dollar, coupled with increasing probability of a revaluation of certain Asian currencies, and possible repercussions of U.S. imbalances on equity and interest rate markets, should benefit global macro players," Alexander Kalis at LCF Edmond de Rothschild Asset Management said.
Funds said they were allocating an average of around 12 percent of their assets to the global macro strategy, up from 10 percent in the October survey.
Above average returns in the first quarter of 2005 were also expected from managed futures, a strategy which uses computer programmes to spot trends in the futures markets and to which the funds in the survey allocate 6 percent of their money.
Another area earmarked for making money was emerging markets, with fund managers noting that some energy and commodity-exporting countries have benefited from the rallies in oil and other raw material prices.
The median in the poll pointed to average to above average returns from emerging market investments in the first half of 2005. However, in terms of asset allocation, equity long/short remains the most popular strategy, absorbing some 30 percent of total funds. It predicts who will do better and who will do worse in relation to general stock market trends and is expected to give average returns over the next six months.
Funds were expecting only marginal positive returns from convertible arbitrage, which relies on spotting discrepancies between the price of a company's convertible bonds and the stock in to which the bonds can be converted. This strategy has suffered in 2004 because of low stock market volatility and a lack of new bond issues.
But the worst performance -- marginal negative returns -- was expected from the short-biased strategy, when funds sell an asset in the hope of buying it back later at a cheaper price. The strategy falters at a time of rising stock markets, when short biased funds could end up having to buy back securities at a higher price, thus losing money.
