| Hedge funds still fulfilling their mission |
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| 05/06/2005 | |
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Nothing seems to be standing in the way of the steady flow of bad news for hedge funds. At this point, that's probably the right time for investors to take a deep breath and say: is it that bad? It turns out that if hedge funds are probably only partially filling their absolute return promises – much easier to fulfil in a bullish stock market environment – they at least fulfil the second part of their promise -- absorbing market shocks and providing some degree of decorrelation among an investment portfolio. All major hedge fund indices are down, but most hedge fund strategies have fared better than the general stock market. So far this year, the Dow Jones industrial Average is down –5.48%, the NASDAQ Composite Index –11.67% and the S&P 500 –4.01%, while the Hennessee Hedge Fund Index has declined far less, giving up 1.62%. By all means, it seems that investors are still convinced that hedge funds are fulfilling their primary mission. Thus far, apart from a slowdown in already strong inflows, it has not been the case as ever more institutions are making the move into alternatives, right when the market for hedge funds has never been so bad since 1998, the year of LTCM's collapse. Despite a drop of 35% of the global inflows in the first three months of 2005, investors poured €19.5bn in hedge funds. Moreover, they seem to have continued to do so in the recent weeks. Results Needless to say, in the still secretive world of hedge funds, the rumour mill has begun to churn at a rhythm that few would have dared to forecast 12 months ago, when hedge funds were still seen as the last frontier of the alpha for most investors. And far more than only statistics, for the first time since the far-reaching collapse of LTCM, actual hedge fund are now being fingered as loss-making, illustrating how deep are the actual problems of the hedge fund industry running. According to various sources, London-based hedge fund manager Bailey Coates would have lost more than 20% of the net asset value of one of its funds so far this year, while Florida-based alternative manager John W. Henry is rumoured to have fared as poorly so far, with a 27% in the net asset value of one of its funds. More worrying, some of the funds managed by Austrian group Quadriga, which have actively targeted retail investors, are down by a whopping 30% since the beginning of the year. As pointed out by Christian Baha, the CEO of Quadriga, an Austrian hedge fund manager, those losses need to be put back in perspective. For instance, Quadriga's Superfund Q-AG, a hedge fund in managed futures, has lost about 11% so far this year, but has increased by 447% since its inception, an average annual growth of about 20%. "Investors in managed futures funds accept the drawdowns and volatility because they believe they will be sufficiently compensated with above average absolute returns in the long term", he says. "In the end it is the result that counts – and that is clear." J.L. |
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