Hedge funds opportunities as markets fall

The current turmoil is providing unique opportunities for hedge funds, according to François Barthélémy, Partner at F&C Partners.

"We like event driven and distressed hedge funds because they seek cheap, value opportunities and at the moment they are spoilt for choice," he said. "But they also look for a catalyst that will realise that value, and they try to keep the book hedged. This is of paramount importance in a bear market."

Barthélémy said that corporates are doing reasonably well, albeit those exposed to the US consumer sector are suffering the most.

"We see many opportunities to make money in equity long-short hedge funds. For instance, mid caps stocks have been coming down severely over the last few months but have relatively outperformed in the last few days, showing there is a floor under the current market turmoil."

Financial stocks are also cheap. "Looking at America's 2000 banks and financial services firms, excluding the largest ones with major balance sheet problems, the vast majority are trading at an extremely low p/e's because they have been pushed down by the market. Moreover, the cost of borrowing is tumbling with the Fed's aggressive response" .

He explained that as many marginal US players have withdrawn from the lending market, they are now able to extract much higher margins from their lending practices.

"By selecting those which have no balance sheet problems one can pick good investment opportunities even in a weak consumer environment" , he adds.

Another investment route where he identifies opportunities is fixed income arbitrage, which looks attractive for the first time in four years. "In the credit market, senior loans – the most senior type of credit assets in the corporate sector - are trading at spreads way above their long term average. This has never occurred before, not even in 1998, and is driven by the fact that many banks have to sell their portfolios, so technical factors have taken over the fundamentals.

He added this is a great time to invest in credit assets, leveraged loans and high yield bonds, where he expects to see very attractive returns over the next two years provided the market returns to rational pricing.