Job Search 2004

Hedge funds raid traditional fund methods
Tue Dec 21, 2004 02:15 PM ET

By Pratima Desai
LONDON (Reuters) - Shrinking returns from hedge fund equity strategies are forcing the industry to foray into traditional fund management and bring these two poles of the investment spectrum a step closer, analysts say.

Some analysts expect the gap between the two fund management styles to disappear over the next decade.

Unlike conventional fund managers, hedge funds can make money by short selling on the expectation of being able to buy a stock back cheaper at a later date. In doing so, they preserve investors' capital during bear markets.

Since they also buy, they gain when markets are rising as do traditional "long-only" funds.

But the range-bound equity markets for much of this year have provided a poor hunting ground for hedge funds, so they too are moving to offering long-only products -- though with more lucrative fees.

Like most other hedge funds they are still offering absolute -- positive -- returns, rather than returns based on benchmark market indices used by traditional funds.

This allows them to charge more than the annual 30-50 basis points traditional fund managers charge, but less than normal hedge fund fees management fees of around 2 percent.

Some have decided not to add on performance fees, while others have made provisions to charge up to 20 percent depending on how well the manager has done.

"They are doing it very simply because they want a revenue stream which creates a higher valuation for their corporation," Jim Hedges, president of U.S.-based LJH Global Investments told Reuters.

COMMERCIAL DECISION

Hedge funds that have launched or are planning to launch long-only products include U.S.-based Caxton Associates, which is estimated to manage around $4 billion, and D E Shaw, which has assets around $9 billion.

In Europe, Egerton Capital, which manages around $3 billion, is also an early player in the sector.

"These hedge funds have made a commercial decision, it stacks up beautifully with traditional managers," said John Godden, European managing director for Chicago-based hedge fund data provider Hedge Fund Research.

"They want to attract money from institutions like pension funds who are afraid of the risks of investing in hedge funds who use leverage, derivatives or short sell."

Overall performance for the long/short equity strategy has varied, but according to Credit Suisse First Boston Tremont Index, the average return between January and November this year was about 8.7 percent.

That compares well with small losses for U.S. benchmark the Dow Jones Industrial Average, but it's lower than the 2003 hedge fund returns of more than 17 percent for this strategy calculated by CSFB/Tremont.

The problem analysts say has been the deluge of money flooding into long/short equity hedge funds amid the few profit opportunities available in flat markets.

According to HFR, the long/short strategy was the most popular in the first three quarters of this year.

Between January and September overall net new money in the industry totalled $45.8 billion, and of that $10.8 billion went to equity long/short strategies, according to HFR.

CONVERGENCE

But this year short selling opportunities have also been scarce, so those that have been available have been spotted easily. As a result, stocks have been returned to fair values very quickly, analysts said.

"There are capacity limits when it comes to shorting stock ... You don't have the same limits to buying," said Luc Estenne, Chief Executive at hedge fund investment adviser Partners Advisers in Geneva.

"The idea is to maximise the returns of the research and maximise the use they make of their long-only research ... There is demand from some institutional investors for long-only which are managed with an absolute return mentality."

Analysts say these new products are following the lead set by traditional fund managers like Gartmore, which currently manages around $6 billion in 14 hedge funds.

"It seems to move in cycles. There seems to be a sort of convergence of the industry going on at the moment," Julian Mayo, investment director at Charlemagne Capital said.

"It's client-led. The hedge fund market is a small fraction of the overall fund management business ... People recognise there is a lot of talent on the hedge fund side."

Analysts estimate hedge funds manage around $1 trillion of global assets, which are estimated at around $45 trillion.



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