Finance and Economic

Exploiting opportunities created by wild market movements, rather than loading up on leverage, will be the key to hedge fund returns this year.

While prime brokers tighten credit lines as the credit crisis unfolds, hedge funds see excellent opportunities arising from panic selling, particularly of credit, by nervous investors — sometimes even by other hedge funds in trouble.

“We may be able to make our 10 percent plus return by having greater disparities in front of us but less gearing,” said Tim Haywood, chief executive and chief investment officer of Augustus Asset Managers.

“I think maybe that’s where we’re going to spend the rest of the summer.”

According to a survey by Britain’s Financial Services Authority, leverage fell from more than seven times to less than three times in fixed income arbitrage strategies — the most leveraged type — between October 2006 and October 2007.

“Part of this is due to prime brokers cutting back exposure to hedge funds but another part has been hedge funds cutting back themselves because of the uncertainty in financial markets,” said Odi Lahav, head of Moody’s European Alternative Investment Group.

The lower leverage and volatile markets have affected returns in a $2.5 trillion industry that has the ability to make money in all market conditions.

August and November last year saw falls of 1.53 percent and 1.21 percent respectively, according to Credit Suisse/Tremont online payday advance. In the first two months of 2008 funds are up just 0.10 percent, with fixed income arbitrage down 0.38 percent. 

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