| Hedge Fund Observer: Absolutely positive and relatively negative |
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| 18/12/2005 | |
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Has the time of the rally finally come for hedge funds, after months of weak returns? According to various leading industry indices, the answer could be a resounding yes. But a closer look at the relative performance of hedge funds reveals a somewhat less glamorous picture. "Hedge funds advanced in November, in line with a market rally", stated the Henneessee Group LLC, whose main index rose 1.42%, leaving it at 6.02% year to date. The trouble is, broad equity market indices performed much better: the S&P 500 increased +3.78 in November. Standard & Poor's own index, the S&P Hedge Fund index, posted 2.01% through the end of November. "Managers were able to participate in the market rally, but were hurt by their short portfolios as the rising tide floated all ships, not just the good ones", said E. Lee Hennessee, managing principal of the hedge fund advisory. Given the situation on the fixed-income market, things might not be taking a better turn for arbitrage strategies, a broad category that accounts for the bulk of hedge funds. "Arbitrage strategies continue to be impacted by a flattening of the yield curve and general weakness in the credit markets due to higher event risk, especially the ease and speed of Delphi's bankruptcy filing, and most recently the demise of Calpine and Refco", said Charles Gradante, co-managing principal of the group. But for most hedge fund managers, the persistent weak performance generated by their industry should be dismissed as nothing more than short-term glitches. The latest report of Cerrulli Associates, the Boston-based research and consulting firm, says that hedge fund assets could more than quadruple by the end of the current decade. This is if no unexpected event stands in the hedge funds' way. Among the few obstacles that could derail this growth, as presented by hedge fund managers, are the industry's lack of ability to mitigate concerns about performance and the need to avoid "seismic collapses". By all means, 2005 might not have been a good vintage with regard to the first obstacle: but despite their high fees, hedge funds have sold well. Cerulli reported that there has so far been an absence of price pressure on hedge funds: a 2% basic management fees along a 20% performance fee is still the standard, up to a 4% / 40% structure for the best performers. The research consultancy said that competition on prices was unlikely to become an issue over the coming years, the most likely scenario being that hedge funds competing "on price may not be around in five years." Cerulli's outlook for funds of hedge funds is not so rosy, in part due to the larger investor base of those vehicles, which cater to retail investors as well. Cerulli noted that inflows were already weaker, noting that the overlay charge coming on top of underlying fees as well as competition from consultants and advisors should limit what funds of hedge funds can charge. J.L. |
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