IPS Capital overview on hedge funds: Jonathan Blain and Chris Brown

Date: 26 Oct 2010

Citywealth

“There is a wide divergence of returns between the various hedge fund strategies and indeed a wide divergence within the strategies too,” says Jonathan Blain, CEO and Co Chief Investment Officer at IPS Capital, a boutique private client investment manager investing with well known managers like Odey Asset Management. “Relative value hedge funds, for instance, have been having a good time of it recently whilst equity long/short managers, have performed badly.”

“Citywealth readers would have been concerned with the equity long/short managers recently who at the end of August lost an average of -0.39%. This is incidentally in line with the S&P 500, so same return as the equity market but lower volatility. The disappointment from the long/short managers comes from the fact that there was an anticipation that in a volatile year such as 2010, hedge funds would shine given their ability to trade more actively and do things like go long as well as short. This, on the whole they have not delivered on.”

“Fundamentally the majority of hedge funds walked into May with too much risk and got hit hard by the sovereign debt crisis, so took quite a bit of pain that month along with the market. The concept of Greece defaulting hit equity markets hard at the end of April/ beginning of May, which hedge funds in the main did not see coming and caused significant losses.”

“Many cut their books in May and June and have then been extending risk from July onwards. They should capture a proportion of the rally so far this month, but not all and so at the end of this month if markets stay as they are, will likely be behind the S&P although with the advantage of less of a roller-coaster ride. The other strategy to think about is global macro (+3.01%) which relatively speaking was acceptable but once again, given the opportunity set of collapsing bond yields with corresponding price rises and violently moving currencies, the return has been disappointing.”

Chris Brown, Co Chief Investment Officer, IPS Capital on Greece.

“Greece had net debt of around 108% of GDP (vs 68% for the UK say) and was running a large budget deficit (around 13% of GDP vs 10% for the UK).”

“Greece is a small country so by itself is not really an issue. The real worry was/is that it will be the first domino to fall with Portugal and Spain next and, after that, maybe the UK and even the US. Or to put in another way, Greece equals Northern Rock with maybe the Spain or the UK becoming the eventual Lehman.”

The crisis has gone away for now after the Germans with the IMF agreed a ‚Ǩ750bn fund in May to lend money to Greece and the other PIGS (Portugal, Italy, Ireland, Greece and Spain). The crisis could still come back though as it is not clear that Greece or others will actually eventually be able to repay their debt. “

“The good thing that happened over the summer was the stress testing of the European banks. These were generally viewed favourably by the market and so this helped stabilise the Greece problem.”

www.ipscap.co.uk

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