Hedge Funds the Next Bubble?

March 25, 2008 |

As the flight to liquidity continues it’s hard not to notice that macro and managed futures strategies, particularly those focused on natural resources, have been the beneficiaries of the asset flows (check out the hedge fund index numbers: macro has been on fire while all other strategies have been taking lumps).  There is massive momentum here, but do the fundamentals justify the valuations?  Although most of the securities underlying these strategies are liquid, they are still subject to significant declines if everyone heads for the exit at the same time.  We’ve seen it before and we’ll see it again: money can leave a strategy just as fast as it entered the strategy.  Furthermore, as we have seen in the past, many traders and fund managers are geniuses on the upside (see the tech bubble), but are susceptible to getting carried out in the midst of a sustained downturn in their asset class (see the bursting of the tech bubble).  Are your macro managers the inheritors of market beta now (i.e., luck), or can they effectively manage exposures and minimize risk during periods of downside volatility?  In any event, this still does not relieve you of your responsibility to diversify across sub strategies, asset classes, operational risks, and multiple market risk factors. 

We say: Diversification, Diversification, Diversification!

Comments