The in-house group, managing $52 billion of client assets via hedge funds and other assets, told a briefing of reporters that the tight credit conditions, would continue weighing on the hedge fund industry and lead to more collapses of funds.
SEOUL (Reuters) - Hedge funds will likely yield good returns from distressed assets in 2008, while M&A-linked arbitrage would dwindle as financial market turmoil is far from over, HSBC's alternative investment group said on Monday.
The in-house group, managing $52 billion of client assets via hedge funds and other assets, told a briefing of reporters that the tight credit conditions, would continue weighing on the hedge fund industry and lead to more collapses of funds.
Arbitrage transactions related to mergers or acquisitions and equity market neutral positions had shone in 2006 and 2007 with brisk M&A transactions, but that would lose steam this year, the bank said, as tight credit conditions bite.
But increased volatility, caused by a meltdown in U.S. subprime mortgages, would provide greater opportunities for top fund managers and higher returns.
!ADVERTISEMENT!"It is too early to tell about when the bottom will happen," said Frank Packard, who leads HSBC's alternative investment group in North Asia.
"The next strategy is distressed (assets)... I would predict there will be more hedge fund collapses this year and there will also be very good fund management returns this year."
Arbitrage trade in convertible bonds and fixed-income products is seen as attractive for the first half of 2008, as companies are increasing CB issuance to raise capital, instead of going to choppy stock markets or banks, the bank's <HSBA.L> investment group said in a statement.
Credit market turmoil has stung many investment funds because of the use of high levels of leverage, or borrowing. Two hedge funds run by Bear Stearns <BSC.N> failed in 2007 due to their heavy exposure to derivatives backed by subprime mortgages.
According to HSBC the global hedge fund industry has grown by a double-digit rate annually to an estimated $1.75 trillion by the end of 2007 since 2001, with growing participation by institutional investors.
Hedge funds are expected to continue to outperform public markets in 2008, and geographically, emerging markets remain positive, compared with developed markets, it added.
A hedge fund index, provided by HSBC, shot up close to 1,000 points at the end of 2007, compared to about 600 four years ago. The bank's indices for equity, bond and cash rose to 400, versus 200 or below during the period.
"In 2008, we believe that we will see hedge funds return to the characteristics of the 1990s, a time period when there was a wide dispersion between the performances of fund managers, more volatility in the financial markets and a wider variety of winning hedge fund strategies," it said in a statement.
The bull equities markets and benevolent credit conditions in the past few years had resulted in similar market views and positions among fund managers, while volatility lessened.
Market volatility -- which hedge fund managers can thrive on -- is on the rise this year. The VIX market volatility index <.VIX>, seen as Wall Street's main barometer of investor fear, jumped to its highest last week since the last bear market bottomed in early October 2002.
Arbitrage is buying an investment asset in one market and selling it at a profit in another market, a typical investment strategy for hedge funds. The more volatile the markets are, the higher returns arbitrage traders can gain.
The HSBC group also recommends managed futures and equity long/short strategies, and is positive about commodities assets.
Things to avoid include excessive leverage, illiquid exotic security and lack of risk management, it noted.
(Reporting by Kim Yeon-hee; Editing by Keiron Henderson)
