Ferd Hedge Fund – 2013 summary
- A very strong year for risky assets lead to improved performance for the overall hedge fund market.
- The hedge fund portfolio performed in line with its benchmark index.
Central bank action drove many of the major moves in 2013, and overall, the year proved to be strong for both developed market equities and credit, with the MSCI World Index (USD) rising 26,7 % and the Credit Suisse HY Credit Index rising 7,3 %. Emerging markets had a tougher year, following the Fed's initial comment on a potential reduction in quantitative easing ("tapering") in May. This also led to a sharp correction in government bond yields, and government bonds had a weak year.
The HFRI Composite Index was up 9,2 % in 2013, but as previous years with significant dispersion between different strategies. Equity related strategies were among the strongest performers (HFRI Equity Hedge Index +14,3 %), but also managers in the distressed space ended the year on a strong note (HFRI Distressed +14,0 %) on the back of strong performance in defaulted bonds and post reorg equity. Systematic strategies had their second challenging year, and was one of few sub-indices with negative performance in 2013 (-0,8 %). The HFRI Macro Index also had its second consecutive year with lackluster performance (-0,4 %), but dispersion among managers was high. Many managers suffered significant losses on emerging market related exposure in May and June following the initial tapering comment. Interest rate exposure in Brazil also proved difficult for some managers in the space.
Ferd's hedge fund portfolio is denominated in USD and hedged to Norwegian Kroner (NOK). The portfolio was up 7,7 % in 2013, in line its benchmark index. The profit for 2013 was NOK 187 million. Following a capital allocation to the portfolio in Q1 and capital appreciation, total AuM as at year end was NOK 2,3 billion (USD 372 million).
After a very active year in 2012, turnover in 2013 was significantly lower. The changes made to the portfolio had a positive contribution to return. The largest contribution to performance came from the portfolio's exposure to convertible arbitrage and the manager's positioning in Japan. The multi-strategy and equity related managers also contributed nicely to returns, whilst the portfolio experienced a challenging period in May/June following the interest rate spike, which negatively impacted some of the CTA and mortgage arbitrage related exposure. The performance of the portfolio's macro exposure was muted, with the managers' exposure to Brazilian interest rates and curve positions in the energy complex being notable detractors to performance. Exposure to systematic strategies yielded mixed results, particularly within the CTA area.
Ferd now has eight years of investment experience with hedge funds. The annualized performance of Ferd's hedge fund portfolio has been 5,3 % and the portfolio's volatility has been 4,8 %. This compares favorably to the annualized benchmark return of 2,1 % and standard deviation of 6 %.
The annualized performance of the MSCI World Index (USD) since 2006 has been 5,7 %. Accounting for the fact that the hedge fund portfolio's realized volatility is less than a third of the stock market volatility in the period, we are very pleased with the risk-adjusted performance of the hedge fund portfolio.
As of February 2014, the Hedge Fund team will be increased by one analyst.
It is reasonable to believe that a key area of focus and potential source of volatility will be the Fed's actions as economic developments unfold, and the markets' corresponding anticipation of rate hikes. Emerging markets continue to be in a vulnerable position, and in Europe, the ECB is faced with low inflation and overall low growth. The development in China also has the potential to become an important driver of market sentiment and performance. However, supported by the current low bond yields, we might still witness another good year for equity markets.
Our main focus will be on maintaining a robust and well diversified portfolio across strategies and markets. The strengthening of the team puts us in a good position to further develop our investment process, including follow-up activity with existing managers, the breadth and depth of coverage of the hedge fund universe and to identify potential market opportunities.