By Neil Wilson
Jabre Capital, the Geneva-based firm headed by former GLG partner Philippe Jabre, completed an astonishing turnaround in July. The firm's flagship JabCap Multi Strategy fund, one of the most prominent victims of the liquidity crunch in Europe during 2008, was up more than 15% for the month, putting it ahead by close to 60% for the year to date in 2009. After suffering a painful drop of 36.4% last year, this superior July performance also meant that the fund had recovered those losses and more—it is now, for the first time in more than a year, back above its high-water mark.
The Jabre flagship fund is also back above $2 billion in assets—with its manager even talking about closing again to new investors when it reaches $2.5 billion. And it is far from being alone. Many of the funds hardest hit last year have gone on to recover strongly in 2009. Some, such as Tosca—the financials-focused global equity fund managed from London by Martin Hughes—still have a long way to go to reach their high-water marks. But even Tosca has shown that it would have been a mistake for investors to have bailed out at the bottom.
All this shows, yet again, how quickly things can change in this business. And why those who were so quick to write off many hedge funds—if not the industry as a whole—were so wrong to reach such a hasty conclusion last year.
To be fair, there has been plenty for the critics to moan about. Going into 2008, many managers had enjoyed successive years of huge remuneration on a lavish fee structure of 2 and 20, but all too often on mediocre performance that was not much better, if at all, than the gently rising equity markets of 2003-2007. Then, when confronted with a truly difficult market in 2008, the majority of these managers failed to cope, registering significant double-digit losses.
What made investors most angry were the managers who responded by effectively changing liquidity terms, locking investors in by imposing gate provisions, creating side pockets or simply suspending redemptions until further notice. This led to the further negative result of punishing the managers who did not block redemptions—who suffered massive outflows instead, from the so-called ATM effect.
That said, there always were two sides to the story. True, some managers really did appear to be acting primarily to save their own skins—in an egregious breach of the covenant of trust with investors. But last year's markets were arguably the worst in 80 years. With liquidity vanishing in many asset classes, some managers did have a genuine case to declare force majeure and suspend redemptions to avoid a fire sale of assets.
Which managers did the right thing and which ones did not? That can be answered only on a case-by-case basis. Ultimately, investors will vote with their feet. And, eventually, the managers who behaved badly will no longer have assets left to manage. Likewise, those who saw outflows purely as a result of the ATM effect should see money return.
Clearly, some harsh lessons were learned last year. After years of growth, the industry did appear to have become too big, with too many mediocre players doing too many similar things. Revelations from the Madoff fraud, of course, have not helped, and were the final straw for some investors.
And so, in recent months, a lot of money has been pulled out. But this does not necessarily mean that hedge funds will be a smaller feature of the investment world in the future. On the contrary, I think that they will grow again—as another big lesson from 2008 gradually sinks in. That is the fact that hedge fund performance in 2008, as disappointing as it was, was still significantly better than the performance of most other major asset classes. Average losses of 15%-20% last year may not have been the kind of absolute return that was expected, but equities were down 30%-40%, which was still significantly better on a relative basis at least.
Furthermore, some of the industry's strategy areas still delivered absolute positive returns last year—most notably managed futures, along with dedicated commodity and volatility players and macro funds. Some funds in almost every strategy area had gains last year. Diversification really did provide some benefits.
So far, in 2009—with the sole exception being managed futures—funds are generally performing well again. As numerous recent surveys have indicated, it seems certain to me that investors will want more—not less—of that.