The lower returns coming out of the hedge fund industry are linked more to a lack of market direction and volatility than over-capacity – leading to less opportunities for managers. Or so says Standard & Poor’s.
“Generally speaking, hedge funds need volatility to make money, and there just isn’t much volatility in many of the global markets,” says Standard & Poor’s Justin Dew. “Currently, hedge fund managers are facing a stagnant fixed income market, and given inflation, rising interest rates and a potential housing market bust, an equity market without long-term conviction. However, energy has been one of only a few highly profitable sectors for many hedge fund trading strategies given its ferocious directional move.Another reason is a given – over capitalized sectors. Some sectors may be temporarily over capitalized, but this is a self-regulating problem. As opportunities exit the market due to tighter spreads on increased assets chasing the same trades, managers become less interested in the marketplace and begin to withdraw. Ultimately only a few ‘players’ are left, spreads begin to widen again and there are opportunities to profit.”