NEW ZEALAND (HEDGECO.NET) – Hedge fund-bashing appears to have become a sport in the last few months, played by media and well-regarded commentators alike, with the prediction of �dire results forinvestors� and �hedge fund implosion� peppering the headlines.
Why is this idea so nonsensical?
Firstly, 2004 so far is likely to be known as the �becalmed� investment year, in which very few, if any, asset classes have performed attractively. To expect hedge funds to continue outperforming in this trendless arena is to miss the point entirely. Contrary to popular belief, the aim of the hedge fund industry in general is to produce palatable, even boring, positive returns with as little risk as possible. It has been shown repeatedly that through both bull and bear equity markets, placing between 5-20% of a portfolio in hedge funds moved the portfolio higher up the efficient frontier. One could argue for a much higher percentage. It is equity funds that one should be using as the �engine� of portfolio growth, and hedge funds as the �shock absorber�.
Secondly, the hedge fund industry currently comprises less than 2% of global managed assets, leaving them with vast room to grow. The transfer of assets from some of the largest investors in the world into hedge funds seems now to be a daily occurrence, as they realise the positive implications of exposing a portfolio to alternative assets. To talk of a �bubble� is at worst nonsense and at best very premature.
Thirdly, there is an increasing amount of pressure on hedge funds to improve their transparency, and regulations are tightening. The potential for another major �blow-up� like the LTCM fund in 1998 is rapidly reducing. Investors are gaining comfort that hedge funds are here to stay.
Fourthly, despite the negative press, the broader global indices have achieved the following year-to-date returns (in US Dollars): MSCI World Equity +2.5%, JPMorgan Global Bond Index +1.8%, CSFB Hedge Fund Index +3.0%. This cannot be described as poor performance. Some of the sub-sectors of this hedge fund index are up nearly 10% in 2004. As with any investment, selecting the winners makes all the difference.
Lastly, some of the brightest money managers from around the globe continue to move into the hedge fund space, as they find a place to display their talents. Some could argue that the best money managers are already hedge fund managers.
The real benefit of having some exposure to hedge funds appears to only hit home when equity markets sink. Only then do investors appreciate the positive return from their hedge fund allocation.
By David Pretorius
www.36south.com
