Beta trackers unlikely to prosper in 2010, says Man

Greater dispersion and volatility is likely in the coming months, which should benefit fund managers that trade more actively, says Thomas Della Casa, head of research, analysis and strategy at hedge-fund group Man Investments in Pffaffikon, Switzerland.

Hedge funds with large beta exposure posted strong gains in 2009, but that is unlikely to be the case this year, he said during a press briefing in Hong Kong last week. "We foresee a lot of dispersion between individual stocks, sectors and regions in 2010," adds Della Casa.

Hence, Man -- which manages $42.4 billion in assets -- will be looking for managers with liquidity and nimbleness that can adjust net exposures quickly, both on the equity and credit side.

Della Casa says the firm favours equity long/short, global macro and managed futures for this year. "For long/short, we look for stock-pickers with low net long exposure and a fundamental bias that can exploit the high level of dispersion," he says.

For global macro, Man is looking for nimble traders with liquid portfolios that take a systematic approach to capturing trading opportunities in currencies, interest rates and global policy changes. Della Casa says increasing fundamental differentiation among emerging markets and G7 countries will be a significant source of opportunities.

"For managed futures, the year 2009 was boring because there were not many major trends in interest rates and FX," he says. "But 2010 will be totally different."

He recommends remaining net long in credit, but also likes long-short credit managers that can benefit from divergence within corporate credit. And while a sharp compression in risk premia has reduced the attraction of relative-value strategies, market distortions will nevertheless present opportunities in fixed-income arbitrage and credit arbitrage.

Looking at event-driven strategies, Della Casa sees special situations as uninteresting at present, due to relatively low volumes, and likewise classic merger arbitrage as less attractive, although prospects may improve when M&A activity picks up further.

Hedge funds as a group seem to feel event-driven is a good bet, if the number of recent launches is anything to go by. Managers that have launched event-driven strategies in the past few months include Atom, FrontPoint, Galaxy and Income Partners.

Meanwhile, Della Casa takes a cautious view on the global economy. Money flowed into risky assets in 2009 as investors bet on a classic v-shaped recovery, he says, but the credit and equity markets are no longer undervalued and volatility has receded to its long-term average.

Moreover, Man Investments is concerned over the high level of debt in some countries. "We should bear in mind that any economy with a debt level over 60% of GDP will not have sustainable growth," says Della Casa.

"Deleveraging occurred in certain sectors such as financials," he adds. "But in the context of the whole economy, deleveraging has not taken place yet, and it will happen in many countries sooner or later -- Greece is a showcase."