Saturday, January 01, 2005
Big November Lifted Returns of Hedge Funds
Big November Lifted
Returns of Hedge Funds
By HENNY SENDER
Staff Reporter of THE WALL STREET JOURNAL
December 31, 2004; Page C1
For most hedge-fund managers, a terrific November helped salvage an otherwise lackluster year.
Hedge funds, the sophisticated investment pools that continue to grow in popularity, struggled in 2004 to put in the kind of performance that has attracted hordes of new investors. With a 2.65% gain in November, the CSFB/Tremont Hedge Fund Index is up 7.91% for the year, while the S&P 500-share index's total return through that period was 7.23%.
"November was a great month for most hedge funds. We had 24 of our 25 funds make money for our portfolio. Our best performance was a global macro manager [who was] up 12%," said Tim Cook, head of Stamford, Conn.-based Kailas Capital, which invests in hedge funds on behalf of wealthy families. He said that the manager who was up 12% had bet against the dollar, and was bullish on emerging-markets stocks and U.S. blue chips.
November, though, was the exception. Indeed, until the penultimate month of the year, most hedge funds underperformed common benchmarks. (Year-end figures won't be available until early next month.)
Not surprisingly, there were plenty of justifications for the inglorious performance over the first 10 months of the year for these funds. Hedge funds are traditionally geared to institutions and the wealthy -- and which make bets for and against a variety of global markets, often using leverage to try to boost returns.
"It was a good return given low interest rates and low volatility," says Robert Schulman, co-chief executive of Tremont Capital Management Inc, a Westchester, N.Y., firm offering hedge-fund research, advice and management services. "This is not an environment in which hedge funds flourish."
But there was plenty of volatility in some markets, notably energy, and some clear trends, such as the fall of the dollar, especially toward the end of the year. And yet, global macro funds were up only 7.71% for the year through November. "It is very disappointing," says Robert Watson, one of the founders of Lyster Watson & Co, which deploys $1.3 billion in capital into hedge funds on behalf of its institutional clients. "You'd have thought that funds which invest in currencies and commodities would have done much better. Instead, they got whipsawed."
The best performing strategies proved to be the beneficiaries of low interest rate -- emerging markets investing and distressed company investing, (along with the umbrella, opportunistic "event-driven" strategies) which were up 10.9%, and 13.43%, respectively.
The middling performance of most hedge funds may cause investors to examine the hefty fee structures hedge funds carry, generally a 2% management fee and a 20% cut of any profits going to the fund managers. By comparison, the average U.S.-stock mutual fund has an expense ratio of 1.49%, according to Morningstar Inc.
As for next year, the successes of emerging markets and distressed-debt strategies may dwindle. Both strategies reflected a massive demand for yield in an environment of low interest rates. Interest rates are no longer falling, and short-term rates are marching higher, narrowing the yield curve, which makes it less profitable to borrow short-term money and invest it in longer term assets.
At the same time, there are factors reflecting the circumstances of the industry itself. There are many skeptics who say the best years of the hedge-fund sector are already or may soon be behind it. This year's performance was almost three percentage points worse than the 10.71% average over the last decade, according to data from CSFB/Tremont.
A recent report from J.P. Morgan Securities asks whether hedge funds "have become so large that they have eliminated the opportunities they are seeking to exploit." The report then describes many popular hedge-fund trades, concluding that the more capital hedge funds devote to these trades, the more excess returns can be expected to disappear.
For example, one of the worst strategies for hedge funds this year was what is known as convertible-bond arbitrage, whereby managers try to exploit price discrepancies between the price of the issuer's stock options and the implied cost of converting the bond into equity. About 10% of all hedge-fund assets have been dedicated to this arcane strategy, according to the Morgan report and hedge funds account for between 70% and 90% of all activity in that market. With such a concentration of hedge funds and their tens of billions of dollars of buying power, all using the same sort of pricing models, it isn't surprising that the discrepancies virtually disappeared. Returns for the year were just 1.28% through November.
Still, nobody expects any outflow of money from hedge funds at year-end, though there may be some redistribution among strategies. Money continues to flow into hedge funds, with the total expected to top $1 trillion in 2005. Heavy demand means high-profile hedge-fund managers -- such as Eric Mindich, who launched the $3 billion Eton Park fund in November, after a meteoric rise at Goldman Sachs & Co. -- have been able to command such favorable terms from investors. Eton Park, for example, requires investors to keep their assets with Eton Park for at least three years.
Also, as more of the inflows come from institutional investors such as pension funds, expectations on what constitutes a respectable return are shifting downwards. "Such investors are risk averse. They want hedge funds to look more like traditional money managers," says Mr. Schulman of Tremont Capital. "They want to be protected from the run-and-gun reputation of the industry and they understand the trade-offs."
Mr. Schulman says that in 2005 investors will "bet last year's winners and short last year's losers." So perhaps the best strategy is what Jonathan Bailly, a partner with Los Angeles-based Dorchester Capital Advisors LLC, which invests in hedge funds on behalf of wealthy investors including hedge-fund managers themselves, suggests -- diversify.
Write to Henny Sender at henny.sender@wsj.com1
URL for this article:
http://online.wsj.com/article/0,,SB110443921506213132,00.html
Hyperlinks in this Article:
(1) mailto:henny.sender@wsj.com
Returns of Hedge Funds
By HENNY SENDER
Staff Reporter of THE WALL STREET JOURNAL
December 31, 2004; Page C1
For most hedge-fund managers, a terrific November helped salvage an otherwise lackluster year.
Hedge funds, the sophisticated investment pools that continue to grow in popularity, struggled in 2004 to put in the kind of performance that has attracted hordes of new investors. With a 2.65% gain in November, the CSFB/Tremont Hedge Fund Index is up 7.91% for the year, while the S&P 500-share index's total return through that period was 7.23%.
"November was a great month for most hedge funds. We had 24 of our 25 funds make money for our portfolio. Our best performance was a global macro manager [who was] up 12%," said Tim Cook, head of Stamford, Conn.-based Kailas Capital, which invests in hedge funds on behalf of wealthy families. He said that the manager who was up 12% had bet against the dollar, and was bullish on emerging-markets stocks and U.S. blue chips.
November, though, was the exception. Indeed, until the penultimate month of the year, most hedge funds underperformed common benchmarks. (Year-end figures won't be available until early next month.)
Not surprisingly, there were plenty of justifications for the inglorious performance over the first 10 months of the year for these funds. Hedge funds are traditionally geared to institutions and the wealthy -- and which make bets for and against a variety of global markets, often using leverage to try to boost returns.
"It was a good return given low interest rates and low volatility," says Robert Schulman, co-chief executive of Tremont Capital Management Inc, a Westchester, N.Y., firm offering hedge-fund research, advice and management services. "This is not an environment in which hedge funds flourish."
But there was plenty of volatility in some markets, notably energy, and some clear trends, such as the fall of the dollar, especially toward the end of the year. And yet, global macro funds were up only 7.71% for the year through November. "It is very disappointing," says Robert Watson, one of the founders of Lyster Watson & Co, which deploys $1.3 billion in capital into hedge funds on behalf of its institutional clients. "You'd have thought that funds which invest in currencies and commodities would have done much better. Instead, they got whipsawed."
The best performing strategies proved to be the beneficiaries of low interest rate -- emerging markets investing and distressed company investing, (along with the umbrella, opportunistic "event-driven" strategies) which were up 10.9%, and 13.43%, respectively.
The middling performance of most hedge funds may cause investors to examine the hefty fee structures hedge funds carry, generally a 2% management fee and a 20% cut of any profits going to the fund managers. By comparison, the average U.S.-stock mutual fund has an expense ratio of 1.49%, according to Morningstar Inc.
As for next year, the successes of emerging markets and distressed-debt strategies may dwindle. Both strategies reflected a massive demand for yield in an environment of low interest rates. Interest rates are no longer falling, and short-term rates are marching higher, narrowing the yield curve, which makes it less profitable to borrow short-term money and invest it in longer term assets.
At the same time, there are factors reflecting the circumstances of the industry itself. There are many skeptics who say the best years of the hedge-fund sector are already or may soon be behind it. This year's performance was almost three percentage points worse than the 10.71% average over the last decade, according to data from CSFB/Tremont.
A recent report from J.P. Morgan Securities asks whether hedge funds "have become so large that they have eliminated the opportunities they are seeking to exploit." The report then describes many popular hedge-fund trades, concluding that the more capital hedge funds devote to these trades, the more excess returns can be expected to disappear.
For example, one of the worst strategies for hedge funds this year was what is known as convertible-bond arbitrage, whereby managers try to exploit price discrepancies between the price of the issuer's stock options and the implied cost of converting the bond into equity. About 10% of all hedge-fund assets have been dedicated to this arcane strategy, according to the Morgan report and hedge funds account for between 70% and 90% of all activity in that market. With such a concentration of hedge funds and their tens of billions of dollars of buying power, all using the same sort of pricing models, it isn't surprising that the discrepancies virtually disappeared. Returns for the year were just 1.28% through November.
Still, nobody expects any outflow of money from hedge funds at year-end, though there may be some redistribution among strategies. Money continues to flow into hedge funds, with the total expected to top $1 trillion in 2005. Heavy demand means high-profile hedge-fund managers -- such as Eric Mindich, who launched the $3 billion Eton Park fund in November, after a meteoric rise at Goldman Sachs & Co. -- have been able to command such favorable terms from investors. Eton Park, for example, requires investors to keep their assets with Eton Park for at least three years.
Also, as more of the inflows come from institutional investors such as pension funds, expectations on what constitutes a respectable return are shifting downwards. "Such investors are risk averse. They want hedge funds to look more like traditional money managers," says Mr. Schulman of Tremont Capital. "They want to be protected from the run-and-gun reputation of the industry and they understand the trade-offs."
Mr. Schulman says that in 2005 investors will "bet last year's winners and short last year's losers." So perhaps the best strategy is what Jonathan Bailly, a partner with Los Angeles-based Dorchester Capital Advisors LLC, which invests in hedge funds on behalf of wealthy investors including hedge-fund managers themselves, suggests -- diversify.
Write to Henny Sender at henny.sender@wsj.com1
URL for this article:
http://online.wsj.com/article/0,,SB110443921506213132,00.html
Hyperlinks in this Article:
(1) mailto:henny.sender@wsj.com
# posted by Tom @ 2:14 PM 
