Fitch: Funds of Hedge Funds

Fitch Ratings, you know - I do not hold very much ...

Well, Fitch Ratings published its quarterly review of Funds of Hedge Funds. Key things in the summary:

2008 worst year in history of hedge funds (HFs) and funds of hedge funds (FoHFs). Cumulative losses (drawdown) reached an all-time high at end-2008.

Global macro and market neutral underlying strategies were the best performers; convertible bond arbitrage and emerging markets worst hit.

Downward correlation of asset prices, credit disruption and liquidity imbalances have virtually nullified the benefits of diversification, such as that offered by FoHFs.

Global equity markets in general have slumped twice the fall of HFs.

The chart courtesy of Fitch (click on image to enlarge).



Well, in this regard it is worth to quote Ben Inker of GMO:

Before getting into the lessons to be learned from the recent past, we should recognize that once the world was in the situation it was in by the summer of 2007, there was no way that portfolio construction techniques could have reduced the size of the overall losses. In 2007, the world saw the most profound bubble in risk assets ever seen, and it is the bursting of this bubble that has led to the enormous loss of wealth we have experienced to date. While we can try to second guess the government policy decisions that have brought us to where we are today, the truth is that most of the money lost in the last 18 months has simply come from overvalued asset classes reverting to the mean. A single institution could have avoided the fall by selling out of all of their risk assets, but if every institution had tried, they would have simply succeeded in hastening the collapse. The world in general is long risk assets. An individual investor selling out or even going short risk only serves to redistribute the losses; he does not reduce them. The only way to have avoided the aggregate pain would have been to have avoided the bubble in the first place, which would have involved changing the way portfolios were invested in the period between 2000 and 2006.