The survey of 41 hedge fund executives managing some $227 billion found that over 20 percent believe that distressed investing will top the league tables for the next 12 months.
NEW YORK (Reuters) - Investing in distressed securities is likely to be a top-performing strategy in 2008, a survey of hedge fund managers released on Wednesday found.
The survey of 41 hedge fund executives managing some $227 billion found that over 20 percent believe that distressed investing will top the league tables for the next 12 months.
By contrast, only 10 percent believed that emerging markets would remain the top-performing strategy that it was in 2007.
Emerging market strategies generated returns of 22.5 percent in the year to December, with Asian investment -- mainly China -- topping the charts at 33.4 percent, according to fund-tracker Hedge Fund Research.
!ADVERTISEMENT!Distressed investing, by contrast, generated only a 5.8 percent return in that period, underperforming the broader 10.2 percent gains for all hedge fund strategies in that period. Final 2007 numbers will be released this month.
The survey of executives who manage an average of $861 million was conducted by Lipper Inc, a unit of Reuters Group Plc <RTR.L>.
Some 17.5 percent of hedge fund managers predicted that "global macro" strategies will be the best performer for 2008, followed by long-short equity strategies at 12.5 percent, the survey found.
Long-short equity strategies bet on rises and falls in stock prices and is the dominant approach in the industry.
Global macro strategies bet on movements of currencies, sovereign debt and other instruments. The strategy generated returns of 10.9 percent from January through November, HFR calculated.
Distressed investors, who typically invest in high yield bonds and other credits, are likely to benefit on the short side with a long-expected pick-up in defaults among lower-rated securities, Lipper said.
It cited Moody's Corp's <MCO.N> predictions that the global high yield bond default rate is likely to quadruple to 4.2 percent by the end of 2008 from a 26-year low of 1.0 percent in November 2007.
Alternatively, distressed managers who bet on a recovery in the broader credit markets could also generate higher returns this year than last, as "sentiment in the credit markets turns positive" after six months of turmoil from the subprime mortgage fallout, Lipper said.
OPTIMISTIC FOR 2008
The survey found that managers are generally optimistic about the investment market for 2008, after numerous challenges in 2007 including worries over a possible global recession and the unraveling of the credit markets.
"A majority of European and U.S. single managers and fund-of-funds managers alike continue to share a very positive performance outlook through the end of 2008," it said.
Asked what a top industry and regulatory agenda item for 2008 should be, some 40 percent of respondents favored "independent marks be applied to securities pricing and asset evaluation," the survey found.
Valuation issues, particularly for illiquid securities, have been a key focus for regulators and investors for years, since hedge fund fees are closely tied to the value of assets under management that may not have definitive market prices.
The finding suggests that managers are aware of demands "to become more transparent in the pricing of securities, especially those illiquid and subject to different interpretations of value," it said.
While any agreement "would increase the cost of doing business," that cost "would almost certainly be offset by the benefits of more transparent pricing to institutional investors," which have been boosting their allocations to hedge funds in recent years.
(Reporting by Dane Hamilton, editing by Richard Chang)
