The Business – HEDGE funds now control $1 trillion in assets. But too much money may be chasing too few good opportunities. The likely outcome is a shake-out. Last week brought the latest sign of animpending hangover: Tremont Capital Management, which tracks cash movements into and out of hedge funds, reported that inflows had fallen in the first quarter.
While another data watcher, Hedge Fund Research, earlier reported that inflows had merely slowed, rather than slid, both findings indicate investors are becoming more cautious about committing money to the funds.
Inflows for the current quarter, which won’t be known for months, probably weren’t helped by reports which upset the markets early this month that some hedge funds had taken big losses on trades involving credit-default swaps and other derivatives linked to General Motors, whose shares did unexpectedly well, even though credit rating downgrades hurt its bonds. In anticipation of a downgrade, many funds had shorted the stock and were long in the bonds.
The episode raised the spectre, however remote, of another Long Term Capital Management, the highly leveraged hedge fund that blew up in 1998. And it probably made some investors and potential investors nervous, reminding them that hedge funds can be quite risky and that they don’t necessarily deliver gains or cushion losses in all kinds of markets, even though that’s what they’re designed to do. ‘No asset class or investment technique has the birthright of a particular rate of return,’ Howard Marks, a principal at Oaktree Capital Management in Los Angeles told his clients in a memo late last year. ‘And certainly not of a high return with low risk.’
