One of this year’s main themes for hedge funds has been to utilize best business practices; but the industry remains to be archaic in this area, according to some.
Hedge funds have had a lukewarm year. Designed to be negatively correlation with the broad markets and offer diversification and superior performance, yet, hedge funds have not entirely done that this year.
The Dow Jones Credit Suisse Core Hedge Fund Index was down 3.76% following the August 2011 volatility compared to a 3.1% drop in the S&P 500 index.
“The hedge fund market will remain choppy into 2012 as long as there is the over-hang of Europe in the markets,” said Nathan Anderson, principal at fund of funds, Blue Heron Capital, and chief executive of ClaritySpring, a service provider of hedge funds.
“Some strategies that are interesting are the volatility arbitrage based strategies; news coming out of Europe has been giving the market whiplash, so strategies that sell volatility at the peaks and buy the troughs have been profitable. It’s not as straightforward as a long/short equity strategy. With hedge funds, we want to be building a portfolio that is uncorrelated to the market and to each other.”
Volatility strategies, along with managed futures practiced by commodity trading advisors (CTAs) promise uncorrelated return but, Anderson also favors global macro for its “go-anywhere” flexibility in unpredictable markets.
“We like are global macro because it’s important to understand the broader environment.”
Blue Heron is based in Washington D.C. and mainly represents smaller managers. The firm’s client base constitutes a range of family offices throughout the Mid-Atlantic region. For these investors, the interest in hedge funds surrounds “their ability to be businesses, not just a portfolio of investments,” according to Anderson.
Anderson has responded to the growing need to better hedge funds as practitioners of good business, through ClaritySpring, a company he co-founded focused on “making hedge fund investing easy and transparent for both managers and investors.”
"ClaritySpring aims to unlock the potential of this industry by leveling the playing field between small and large managers. There has been a growth in demand for due diligence, efficiency, and transparency from investors," Anderson told Markets Media.
Communications within hedge funds is one of the main areas in which ClaritySpring hopes to improve.
"About 90% of hedge fund managers are still sending documents via email, which is neither secure nor effective. They’re really still in the Stone Age regarding investor relations processes; no hedge fund investor should have to wonder whether the fund is holding back information, or whether other investors are getting more information. The gross inefficiencies in the current process end up raising questions that should never have to be asked," Anderson said.
“No one has a crystal clear view of what needs to happen from a compliance point of view—it’s still a very hazy part of the industry.”