A better year ahead for hedge funds?

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I have been a fan of alternative investments like hedge funds for a very long time. Investors who want to achieve superior returns without commensurate risk must look beyond traditional asset allocation models. However, you have to be careful about the hedge funds that you pick. Selecting the wrong ones can ruin your life.

An article from Reuters caught my attention early this morning. According to the story, a handful of hedge funds ended 2017 with double digit returns, their investors said, at a time the $3 trillion industry took in fresh money and posted its best returns in years, industry data show.

Activist hedge fund Marcato Capital Management, which waged proxy fights at Buffalo Wild Wings and Deckers Outdoor Corp. last year, ended 2017 with a 25.6% gain at its flagship fund while its smaller Encore portfolio climbed 22.6%.

Atlantic Investment Management, which focuses on bets that inexpensive stocks will appreciate in value, posted a 16.4% gain in its Cambrian Global Fund. Both firms beat the industry average with industry tracking firm Hedge Fund Research reporting that the average hedge fund gained 7.6% through the end of November.

Stock oriented funds posted a 12% gain through November. December numbers have not been released as many hedge funds are still tabulating their performance for the year, but so far the industry is on track to post its best returns since 2013, the Hedge Fund Research data show.

Similarly Renaissance Technologies, staffed by nearly eight dozen scientists with doctorates in physics, math and other fields, posted a 15% gain in its Renaissance Institutional Equities fund, the firm’s oldest portfolio available to outsiders.

Back to my thoughts, what can we expect from hedge funds in the year ahead? In the bigger picture, there are other issues surrounding global growth, central bank tightening, and protectionist administrations, which are likely to give rise to volatility in the coming months.

Hedge fund strategies that could benefit in a higher rate environment are currencies as well as commodities, which should slowly grind higher in 2018 as investors shift their focus to fundamentals as opposed to short-term noise.

Elsewhere, long-short equity managers should be able to take advantage of the two-way markets, especially because some sectors that led the way in 2017 may lose attractiveness due to higher valuations after the strong performance.

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