| Hedge Fund Observer: positive at last |
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| 25/09/2005 | |
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A forthnigthly wrap of hedge fund industry events Just when hedge funds seem to be consolidating their recent gains, the Dutch financial authority, the Autoriteit Financiële Markten (AFM), has issued a report investigating the risks generated by those vehicles. The AFM says that the hedge funds' lack of transparency is its main concern. Investors, some of whom with apparently very little understanding of the investment policies and the risk profile of some hedge funds in which they invest, are also part of the problem, according to the Dutch regulator. Hedge funds, says the AFM, could also induce price volatility in the market. "Although sharp price fluctuations are not a phenomenon inextricably connected to hedge funds or going short, hedge funds are usually subject to fewer constraints than other institutions. As a result they have – at least in theory – more opportunity to manipulate prices when it suits them." The sheer size of many hedge fund managers is indeed impressive and raises some questions about their ability to destabilise the markets. A survey by the trade magazine HedgeFund Intelligence reports that there are now 196 US-based hedge fund firms that manage over $1bn in assets, for a total of $743bn, that is, three-quarters of the global hedge fund industry. However, the Dutch regulator refrains from making a compelling case about the introduction of measures specifically targeted at hedge funds, only saying that it will continue to carry investigation for eventually enhancing hedge funds' transparency. It does not forget either about the positive aspect of this industry: "For example, the activities of hedge funds can contribute significantly to improving the efficiency of the market, e.g. by providing liquidity." Bright spot For many hedge fund investors paying hefty management and performance fees, those positive aspects might be easier to grasp when the industry shows signs of its good shape. HedgeFund Intelligence, a trade publication, reported that overall assets expanded by 9.3% over the last 12 months ago, despite a tougher environment for the first half of 2005. Those clouds now seem to be giving way to clearer skies. The Hennessee Hedge Fund index posted a strong 0.90% increase in August, pushing it to +4.50% year-to-date. The Hennessee index climbed while all main indices fell. The S&P500 released 0.90% (1.93% YTD), the Dow Jones Industrial Average -1.50% (-2.80%) and the NASDAQ Composite Index -1.50% (-1.07% YTD). "Fed tightening continues to worry most mangers as they fear the Fed may go too far. Nonetheless, higher cost of capital has helped fundamentally driven stock pickers as "noise" from speculation and momentum traders declines", says Charles Gradante, Managing Principal of Hennessee Group LLC. This resiliency is leading some hedge fund industry players to celebrate their industry's strength. "Whenever hedge funds stumbled, there was speculation about their demise. The industry continued to grow", writes George Van, founder of Van Hedge Fund Advisors and the author of a report on the state of the hedge fund industry. He expects the industry to grow to $4 trillion by 2013, and $6 trillion by 2015 and to continue coping successfully with the demand. Two analysts at IXIS CIB, an investment bank, Florent Pochon and Jérôme Teleïtche, agree with this view on the structural capacity of the industry. The poor performance of the first half of 2005 was rather due to cyclical factors, on which the industry should continue to depend into 2005 and 2006. "Hedge fund performance in the coming months will depend on both the financial and economic environment", they say. "Those who still believe in the illusory total decorrelation of those vehicles will certainly have revisited their original views by then." J.L. |
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