London - Funds of hedge funds expect to make moderate profits in the next six months by betting on trends in the global economy and investing in Japanese and European equities, a Reuters poll shows.

The survey showed managers of funds of funds expect returns to improve in the second half of the year as volatility picks up in foreign exchange and bond markets.

The survey of 14 funds of hedge funds, who together manage some $87.6 billion of assets, gave a median forecast of average to slightly below average positive returns over the next six months. This is broadly unchanged from expectations at the time of the last poll in March.

Funds of hedge funds spread their money over a range of hedge fund strategies to minimise risk. Hedge funds themselves invest in a wide range of different assets and should in theory make money even in a falling market. But the industry has seen returns dwindle in the last two months, due mainly to falling oil prices and a sell-off in corporate debt, sparked by the credit downgrades of General Motors and Ford.

The Reuters survey found that going forward one of the best performances was likely to come from pursuing a global macro strategy, which involves taking positions on macro-economic trends, and spotting trends in currencies and commodity futures.

"We think that global macro will have a positive performance in the short term," said Arne Hassel at Coronation Fund Managers.

"The issue about the creditworthiness of (U.S. car makers) General Motors and Ford, the potential Chinese currency revaluation (and) the ongoing risk that the U.S. Federal Reserve changes course ... are among the most important factors that will drive this strategy."

Funds in the poll allocated an average of 14 percent of their assets to global macro over the next three months.


Long/short equities remained the most popular strategy, absorbing some 30 percent of the money.

By predicting which stocks will do better and which will do worse than the actual market, the funds were expecting to get slightly below average positive returns in the third quarter, rising to average returns in the final three months of the year.

On a regional basis, European and Japanese stock markets were seen offering better returns than U.S. ones.

"We are concerned about the lack of opportunities in the U.S. equity long/short market, possibly due to overcrowding in that strategy," said Brendan Robertson at FIM Limited. "Europe and Asia offer better value and more diversification."

Emerging markets were also said to offer good opportunities, and not just in equities. Funds in the survey allocated around seven percent of their cash to the strategy, and forecast average positive returns.

"We believe there is both a valuation case and a market case for good returns in emerging markets, despite the recent short-term volatility. We expect this strategy to perform well over the next six months," said Tim Gascoigne at HSBC Republic Investments.


On the downside, no returns were expected from the short-biased strategy in the July to September period, with losses then forecast in the fourth quarter.

The strategy involves selling an asset in the hope of buying it back later at a cheaper price and thus can backfire at a time of rising markets.

Convertible arbitrage was also forecast to give no returns in the next three months. But the strategy, 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, was seen staging a come-back later in the year to give average positive returns in the fourth quarter.

"There will be an eventual opportunity to invest in convertible arbitrage if liquidations continue," said Manuel Echeverria at Optimal Investment Services.

The median showed funds of funds allocating four percent of their money to convertible arbitrage in the third quarter, rising to five percent in the final months of the year.

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