For hedge funds it may be Time for a trim, according to Economist columnist Buttonwood.
What is it about hedge funds? If lawyers hadn’t already taken all the worst jokes, hedge-fund folk would certainly be contenders. The high-paid managers of these lightly regulated investment pools are blamed for everything from the high price of oil to the crumbling of corporate governance. Yet they are looking anything but omnipotent these days, as rumbling scandals combine with so-so performance to turn many traditional investors off hedge funds before newer institutional fans are firmly committed to them.
One concern is allegations about Man Group and Gamco Investors, which "sit at the heart of the fund-management establishment". But whith around 8,000 hedge funds now operating it is "not unusual to find a handful of bad apples".
More worryingly and more generally, growth is slowing sharply. In Europe, hedge-fund assets increased by only 9% in the six months to June 2005 (to $279 billion), according to EuroHedge, a trade publication, after growing by about 50% in all of 2004. In America, according to a related publication, Absolute Return, the hedge funds with more than $1 billion in assets under management also grew by only 9% in the first half of this year.
Rich private clients in Europe are reportedly now redeeming more than they had invested. Meanwhile, fund managers have yet to rush in. Greenwich Associates research "shows that, despite all the talk, pension funds’ allocation to hedge funds has stayed flat". Part of the reason for the lack of investor enthusiasm is poor performance:
Hedge-fund returns, net of fees, were 4.2% in the year to August, according to CSFB/Tremont’s measure - less than brilliant compared not only with what they were in the 1990s but with total returns on European shares (though returns on the stagnant S&P 500 were even worse).
But it's not just about poor returns:
More may be at work here than undistinguished returns. After all, protection of capital in bad markets and good - not stratospheric returns - is a large part of what hedge funds are supposed to be about. They are prized for adding stability to portfolios, for being uncorrelated with mainstream markets and for minimising risk through diversification. There are increasing doubts these days as to how much most hedge funds are really doing that - about whether, in short, hedge funds are hedging.
Several relatively recent studies* reach disturbing conclusions. The first is that hedge funds overall - even those that define themselves as “market-neutral” - are more correlated with equity markets than used to be thought, and that different strategies are also more correlated with each other than they look. So much for diversification. Another conclusion is that because many hedge-fund investments are relatively illiquid, the way in which they are periodically priced tends to “smooth” returns and hence make funds appear less risky than they are. So much for fancy risk-reward measures such as Sharpe ratios. A final conclusion is that hedge funds are now big enough and intertwined enough with banks to be a new source of risk to the financial system as a whole.
As hedge funds become more like pension funds, there are moves towards more standardised trading procedures and greater transparency:
Just as mutual funds, the investment growth story of the 1980s, were eventually forced to divulge more information, hedge funds will be too. The old argument for exempting them from disclosure - that they dealt only with knowledgeable investors - holds less and less true, as more middle-income investors buy their way in through funds of funds and the like, and ordinary workers’ pension funds commit their future wellbeing to hedge funds. Nor is what most hedge-fund managers do beyond the wit of man to comprehend: equity long/short strategies are the biggest investment style these days.
Thank you for this wonderful article ... really very nice - there are such things
şiir
güzel sözler
Fena sözler
Posted by: Aşk mektupları | Friday, July 30, 2010 at 02:19 PM
Such a good writing, or by I saw for the first time. I'm quite happy, you are a good writer
Posted by: Ken Griffey Shoes | Friday, April 29, 2011 at 10:36 AM