Hedge Funds Suffered a Dismal Year in 2011

(January 10, 2012) — Hedge funds concluded a bleak year for 2011, posting one of their worst performances ever, according to new data released by Hedge Fund Research (HFR).

According to the research firm, the average hedge fund sank a total of 4.8% in 2011, compared to rising by more than 10% the previous year. In contrast, the Standard & Poor’s 500 stock index ended 2011 roughly flat.

“Volatile and unpredictable market dynamics throughout the year created a challenging environment for hedge funds in 2011, with aggregate losses across currency, commodity, Emerging Markets and equity strategies related to the European currency and sovereign debt crisis,” said Kenneth J. Heinz, President of HFR, in a statement. “Risk-off trades dominated 2011, creating challenges for convergence oriented funds, while contributing to gains across fixed income and certain low net exposure hedged strategies. After a challenging 3Q, hedge funds adapted strategies to this continuing macro-volatility dynamic in 4Q in anticipation of this environment persisting into early 2012.”

HFR noted that two strategy areas ended 2011 with gains in December, including Macro (+0.16%) and Relative Value Arbitrage (+0.50%) strategies; Fixed Income-based Relative Value was the only strategy area of positive performance for full-year 2011, gaining +0.55%, while Macro declined by -3.6%. Event Driven posted a narrow decline of -0.01% in December and -2.65% for 2011.

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Earlier this month, Singapore-based Eurekahedge Pte. revealed that total asset flows for the year for hedge funds were $67 billion, lifting the size of the overall industry to $1.72 trillion.

Latin American hedge funds provided the best returns for 2011, gaining 2% over the year, Eurekahedge found. The second best performing region was North American hedge funds, even though it was in negative territory for the year, with a drop of 0.8%.

Despite the bleak year for hedge funds, an annual survey by the UK-based National Association of Pension Funds recently showed that pension money is going into hedge funds at a faster rate than other asset classes. The firm found that the allocation to hedge funds has risen from 2.6% to 4.1% over the last year.

The shortfall in deficit-stricken UK pension schemes hits record levels, and worse could be still to come as the European economic situation stagnates.

(January 10, 2012) — The shortfall of pension schemes in deficit in the UK hit record shortfalls last year due to a perfect storm of poorly performing assets and rising liabilities, data has shown today.

The aggregate shortfall of pension schemes in deficit more than quadrupled over the twelve months to the end of December – from £61 billion in 2010 to £277 billion last month – figures from the Pension Protection Fund (PPF) showed today. The PPF acts as a lifeboat for bankrupt company schemes and tracks corporate pension scheme funding in the UK.

Previously, the record deficit had been £253 billion, which was reached at the end of March 2009 in the aftermath of the collapse of Lehman Brothers and immediate stock market meltdown.

John Belgrove, principal at investment consultant Aon Hewitt, said: “It is no surprise the deficit has increased – it reflects market circumstances. There has been a further decline in real yields – which are used to measure liabilities – and risk assets did not perform over 2011.”

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In the 12 months of 2011, the MSCI World Index fell by 7.21%. MSCI’s UK index fell by 6.12%.

Corporate bond yields also fell over the year, which helped corporations on one hand as it reduced potential interest payments, but on the other hand, it pushed up pension liabilities, against which they are measured.

Belgrove said: “Pension schemes are in a difficult position – but they must remember that these deficits do not have to be filled by next week. Patience, driving assets, and managing risks are what they are going to have to live by over the next few years.”

The PPF also reported some of the lowest levels of surplus for those schemes still in the black. At the end of December, the surplus of these schemes was only £22 billion. In mid-2007, this number had been over £150 billion.

The record lowest surplus was in March 2009 when the number fell to £11 billion.

The PPF uses one of the toughest methods to value pension scheme deficits. It calculates what would be needed to buyout the scheme.

Last week, investment consultant Mercer showed pension scheme deficits from all schemes in the UK had tripled over 2011 to hit £84 billion, up from £61 billion a year earlier.

Belgrove urged scheme trustees and investment managers not to panic and warned the worst was not over.

He said: “In the short term, things might get worse – especially until the Eurozone crisis is resolved. Expect higher real yields in the medium term, but in the short term, they are likely to sink even lower.”

<p>To contact the <em>aiCIO</em> editor of this story: Elizabeth Pfeuti at <a href='mailto:epfeuti@assetinternational.com'>epfeuti@assetinternational.com</a></p>