Hedge fund execs expect credit crisis to rumble on

Date: Wednesday, June 17, 2009
Author: Martin de Sa'Pinto, Reuters

The credit crisis is set to rumble on as economies struggle to digest problem assets, Global Alternative Investment Management (GAIM) conference-goers said in a poll on Tuesday.

Of the 200 investors and asset managers polled by GAIM in the session, 65 percent of those who voted said the crisis would drag on, while 17 percent said it was over and an equal number said it would deteriorate.

"Bailouts (of banks) have worked somewhat, but problems have been transferred to governments," said Peter Rigg of HSBC Private Bank, confirming that he believes the crisis is still to run its course.

A second poll showed developed economies are the main area of concern, with 59 percent saying Europe is the major trouble spot, against 35.5 percent who said it is the U.S.

"The worst problems are in western economies that have relied on leverage to grow Economic power is going East," said Jaime Castan of RMF Investment Management.

However economies such as China would not be immune to problems in the U.S. and Europe, said Marc Lasry of Avenue Capital.

"There's a huge fiction out there that Asia is going to be fine, but it needs a strong U.S. and Europe to grow," Lasry said.

The hedge fund strategies investors said would perform best in the coming 12 to 18 months were distressed debt/event driven, global macro, and managed futures (CTA).

Global macro strategies bet on movements in securities such as equities indexes, interest rates and currencies, while CTAs use computer programs to exploit trends in certain asset classes.

"Some of the big macro shops are trading in a much more dynamic way and are well-positioned to survive. Distressed is very interesting, but only if you're willing to take the necessary lock-up," said Castan.

Surprisingly, although most of the respondents saw the credit crisis continuing, there were few fans of short selling, among the least popular strategy. Only long only strategies had fewer supporters.

In the investment sphere, the major concerns centered on market liquidity, the lack of alpha (meaning that there is limited scope for managers to outperform the market) and risk management. Is the credit crisis over? No, it will rumble on 65.2 pct No, and the situation will deteriorate 17.4 pct Yes 17.4 pct Where are concerns greatest? Europe 58.9pct U.S. 35.5 pct Other emerging markets 5.6 pct Asia - Which investment strategies will perform best in the next 12 to 18 months? Distressed/Event driven 28.3 pct Global Macro 23.9 pct Managed futures 17.4 pct General arbitrage 9.8 pct Equity Hedge 8.7 pct Cash 6.5 pct Short Sellers 3.3 pct Long Only 2.2 pct