Hedge fund BH Global is simplifying its fee structure which in effect amounts to a fee cut and brings the sector back into the limelight.
Tepes says that following a few years of boring performance this could be a good time to buy into the sector as developed world markets look frothy – particularly given the discounts that have opened up.
“Thinking about what are strategies that could go up in a flat or downward market there aren’t many out there and one is hedge funds,” she said.
“Generally this is the time you want to pick these funds up. People are frustrated with them and these things get left behind therefore you get discounts opening up as well.”
“When markets fall out people look for a bit of security. If they start posting positive NAV gains in falling markets they will get more interest and will rise onto premiums.”
Hedge funds as a sector have fallen out of favour in recent years. Many suffered in the stressful market conditions of 2007 and 2008, losing investors’ confidence in their claims to be able to protect capital and make gains with low volatility.
However, a handful proved themselves in that period including BH Macro, the flagship fund of Brevan Howard. The fund ended 2008 up 28.36 per cent as the FTSE All Share lost 29.93 per cent.
Performance of fund vs sector and index in 2008
Source: FE Analytics
Again in 2011 when the markets fell the outperformance of BH Macro was substantial.
Performance of fund vs sector and index in 2011
Source: FE Analytics
However, the performance of this fund and of the other leaders in the sector has been less impressive in recent years as equity markets have been strong.
BH Macro has made 10.79 per cent in three years and BH Global 13.47 per cent while Bluecrest Allblue has made just 0.93 per cent. The FTSE All Share is up 27.5 per cent over the same time.
Tepes suggests that this could be a good time to buy into the sector given the dangers surrounding equity markets and the strong period of multiple expansion.
However, she suggests that BH Global isn’t the best choice in the sector.
Funds in the open-ended pool BH Macro are allocated to individual traders who run their own books following different strategies. Tepes says that roughly 40 per cent is run by Alan Howard, the joint founder of the firm.
BH Global, on the other hand, has been run differently with shares of its money allocated to different funds run by the firm. As well as simplifying the fee structure the fund is proposing to invest all of its money in the same way as the more successful BH Macro fund does.
Tepes suggests that the flagship fund is likely to be the more important fund for the firm and is her preference in the sector.
“BH Global isn’t one of the strongest out there,” she said. Part of the reason they have changed the way they invest in those funds is because this one hasn’t had a good time of late. It has had an unimpressive run and not as good as BH Macro.”
Data from FE Analytics shows that the fund sold off alarmingly following the “tapering tantrum” of last spring when the US Federal Reserve first warned it would be looking to wind down its quantitative easing programme.
Performance of funds vs equities over 2yrs
Source: FE Analytics
However, this underperformance could bring opportunity of its own, Tepes says, given the discount that has opened up.
“BH Global starts on a large discount therefore you can play that as well as BH Macro is a large part of it and therefore its outperformance will hopefully help.”
BH Global is trading on a discount of 8.7 per cent and BH Macro 5.7 per cent, according to the AIC.
BlueCrest AllBlue, another fund Tepes rates in the sector is trading on a 4 per cent discount although BlackRock Hedge Selector UK Emerging, her other preferred fund, is on a 1.3 per cent premium.
“When performance returns investors will come back naturally,” Tepes says. “The argument for these funds is you don’t get huge drawdowns on an NAV level – they shouldn’t lose 10 or 15 per cent.”
“These are the kind of things you would hope when markets have been very weak they have delivered very good returns.”
“When markets are roaring ahead they can be boring or lose you a bit of money but you would hope when there’s “capital dislocation” as they call it they will come into their own. When everything else is down these things will be up.”
Tepes says that the funds operate by taking skewed bets which are very lucrative if they come off but have limited downside if they do not.
