During 2012, Ferd Hedge Fund was established as separate business area within Ferd
Political statements, policy intervention and stimulus continued to dominate the markets also in 2012, with less attention to fundamental valuations. Sentiment changed markedly and many times during the year, but 2012 ended up as a good year for risky assets. The MSCI World Index and the Oslo Stock Exchange were both up around 15%, and in the credit market, investors benefited from tighter spreads during the year.
The hedge fund portfolio had a good year, significantly outperforming its benchmark index. Significant contribution from manager selection.
The broad HFRI Composite Index was up 6,4%, but there was notable dispersion on the strategy level. As in 2011, systematic strategies in general had a difficult year, independent of their time horizon, and the HFRI Macro Systematic Index was one of few strategy indices with negative return for the year. Global macro funds also posted weak returns in sum, but unsurprisingly, dispersion among managers in this group was high. Credit related strategies were the top performing group of funds in 2012, with structured credit on top, followed by distressed managers, emerging markets fixed income and relative value credit.
Ferd's hedge fund portfolio is denominated in USD, and hedged to Norwegian Kroner (NOK). The portfolio was up 7,8% in 2012, outperforming its benchmark index, the HFRI FoF Conservative Index, by 3,6%. The profit for 2012 was NOK 133 million, and total AuM at year end was NOK 1,7 billion (USD 308 million).
Turnover in the portfolio was slightly higher than normal in 2012, and it is pleasing to note that the sum of the changes done during the year have had a significant positive impact on performance. In the investment process, the primary focus is to identify good managers, but during the first half of 2012, the portfolio's exposure on the strategy level was significantly changed in a couple of areas; the exposure to discretionary macro was increased whilst the exposure to systematic strategies was reduced significantly.
Ferd now has seven years of investment experience with hedge funds, and the activity and results are very pleasing. To illustrate, NOK 100 invested in the portfolio at the start of 2006 has grown to NOK 141 at the end of 2012, equivalent to an annual return of 5%. The same amount invested in our benchmark for hedge funds would have grown to NOK 110. Hence, the total outperformance of the NOK 100 investment is NOK 31, or 3,7% annualized. By way of comparison, investments of NOK 100 in the global equities index (MSCI World) and in the Oslo Stock Exchange would have grown to NOK 123 and NOK 134 respectively. If one also accounts for the fact that Ferd's portfolio has shown lower volatility than the hedge fund market, and has a realized volatility of around 25% of the volatility seen in the stock market, we consider the risk-adjusted outperformance to be very good.
During 2012, Hedge Fund was established as a separate business area within Ferd. The hedge fund portfolio was previously organized under the Alternative Investments area, which ceased to exist as a unit. Ferd Hedge Fund currently has one investment professional.
The likelihood of extreme outcomes in the EU and for the Euro as a currency seems to have abated over the course of 2012. However, the measures taken in 2012 helped liquidity rather than solvency, and uncertainty related to future growth given the austerity measures implemented in several countries remains high. The US faces important political processes related to the debt limit and spending cuts. Financial markets are therefore likely to continue to be influenced by political events also in 2013.
The investment process is not based on an overall macro view. The primary focus is on identifying good managers who generate performance which mainly can be attributed to skill without too much dominance by specific factors. The correlation to risky assets, in particular the equity market, is also an important factor we pay attention to. Given the relatively high turnover in the portfolio in 2012, we expect somewhat lower turnover in 2013.