Relative value outperforms its peers

Relative value hedge funds are delivering better returns than at similar stages in the last business cycle and are gathering more money than their peers, according to Hedge Fund Research.

Relative value hedge funds exploit differences in the relative values of stocks and bonds, typically from the same issuer, according to Kenneth Heinz, the president of Hedge Fund Research. In 2003 and 2004, the first two years of the last bull market, they delivered gains of 9.7% and 5.6% respectively.

In 2009 and 2010, however, they returned 25.8%, then 11.7%. The strategy saw inflows of $21.5 billion (£13.5 billion) last year, higher than the second-placed strategy, macro, on $17.3 billion. (article continues below)

The lowest inflows were into the largest hedge fund group, equity hedge. By contrast, funds of hedge funds saw net outflows total­ling $11.8 billion.

Heinz says relative value benefited from a massive rush of money back into the financial system in 2009 after a sharp withdrawal in the last half of 2008.

Convertible arbitrage, a more niche strategy exploiting the valuation of convertible bonds, also benefited from a large flow of cash back into the market. Convertibles, or bonds with an option to convert into stocks, also trade on the relative valuation of stocks and bonds in the same company.

The strategy was the top-­performing hedge fund category in both 2009 and 2010, with returns of 60.2% and 13.1% respectively.

Heinz says equity hedge is receiving relatively small inflows ­because of uncertainty created by the eurozone debt crisis, potential overheating in China and their impact on the equity markets.

He says funds of funds were still recovering from the financial crisis when several funds invested in portfolios managed by Bernard Madoff, a fraudulent New York-based investor.