Investors want hedge funds to 'stick to their guns' and not try to 'be heroes' as markets get turned upside down

Business Insider Finance 2 months ago

The markets are causing a panic. But investors are hoping hedge fund managers trust their process and stick to their strategies.

A crash in high-flying growth stocks last week smacked momentum-tracking hedge funds, with one US pension seeing its trend-following funds surrender their August gains in a couple days. And a huge spike in crude oil prices this week hit many funds with bearish views on the commodity.

The best thing whip-lashed hedge funds can do right now is stay the course, said Jon Aikman, a finance professor at the University of Toronto. He sits on the school's endowment and pension investment committees, which allocate more than $5 billion.

He wants hedge fund managers to "stick to their guns and continue what they are doing."

"If they see dislocation they can take advantage of, go for it, but I don't want to see a big sell-off," Aikman told Business Insider. "If they're just going to sell out, I can get an ETF to do that."

In an email, David Bahnsen, a wealth manager at Bahnsen Group who manages more than $1 billion, said "in times like this, and any other time, our objective with hedge funds is, always and forever, non-correlation."

"An absolute return objective is preferred, but we are never looking for our alternative strategies to 'lean into' volatility or momentum, on either side," Bahnsen wrote.

Likewise, another allocator to hedge funds said he doesn't look for managers that "try and be heroes" during times of market stress.

One hedge fund manager with total assets in the billions said they try to explain to investors that drawdowns happen in times like these, adding that "it's how you react to market dislocation that makes a fund."

Cautious institutional investors like pensions, endowments and foundations have already pressed hedge funds to think more long-term. Hedge funds' equity exposure meanwhile is at the lowest level in a decade.

On the other hand, hedge funds are under pressure to prove their worth to investors who have complained about the industry's high fees. Many managers are seeing opportunities in the fragmented market.

One hedge fund that focuses on technology stocks was excited for the "reset" of the market for growth stocks, which were hit hard during momentum's slide last week.

Another fund that looks to make money in times of market stress said it usually sees inbounds from potential investors flood in after a serious dislocation.

"Clients always worry when there are unexpected events and market moves. The question is always — has it hurt our portfolio? — fortunately, the answer is no. We're right-sized and we've got hedges in place. We've also been taking advantage of the volatility to add to positions," wrote Sir Michael Hintze, founder and CIO of $18 billion fund CQS, in an email to Business Insider.

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