| Hedge Fund Observer: No need to worry for investors with proper due diligence processes |
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| 01/10/2006 | |
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The global financial system barely flinched, but let's bet that many investors thought about the potential explosive consequences of Amaranth's blow up. For now, the losers have been limited to the fund's direct investors, which have lost $6bn and could have the rest of their investments locked up for a four-year period. Should European hedge fund investors start to worry about their investments? "The demise of Amaranth will certainly steer investors toward a more careful selection of their hedge fund investment," comments Cyril Julliard, CEO of the Paris-based multimanager European Research & Alternative Management (ERAAM), emphasising both the qualitative and quantitative nature of such a selection. He also adds that there is no reason to panic, especially for institutions investing in European hedge funds, which are subject to much more thorough control than their American counterparts. "The FSA does a really good job of overseeing European hedge funds, which are mostly based in London," he says. "Furthermore, the pricing and the reporting of the funds are not performed by the fund itself, which is often the case in the US for unregistered funds." European investors, says Mr Julliard, are also usually concerned about due diligence and regular reporting due to their nature. "In Europe, most hedge fund investors are institutions, while in the US, hedge funds have a long tradition of being a rich man's toy with less concern for nitty-gritty administrative and risk control issues." Amaranth's ills were accompanied by previous warning messages, the most obvious being that the multistrategy fund was propelled uniquely by its energy strategy. Being an institution did not do much to protect some sophisticated hedge fund investors such as the Ontario Teachers Pension Plan (OTPP), one of Canada's largest, from being caught in Amaranth's trap. In Europe, Swedish fund AP7 was the first to report losses stemming from Amaranth. Opportunity The US Securities & Exchange Commission could use the incident as a window of opportunity to reassert its plan for hedge fund registration. Criticisms have been levelled at prime brokers, which have been accused of being soft on their risk assessment of hedge funds. If the US financial watchdog comes to the conclusion that investors and prime brokers alone are not able to self-regulate the industry, it might as well decide to do it on its own in a much more forceful manner. At a hedge fund industry panel hosted by Dow Jones Indexes, John Prestbo, editor and executive director of Dow Jones Indexes said that as institutional investors would focus on implementing stronger due diligence capabilities as well as more transparency and risk management tools as more of them turn to alternative investment vehicles. "Most institutional investors are trying very hard to get their arms around proper due diligence and find it very difficult to find consultants who can provide them with objective information. Therefore, they have been looking internally to develop processes that address these needs; this is problematic as most trustees do not have the experience to pick appropriate managers," added Daniel Strachman, managing partner of A&C Advisors LLC, a strategic consulting firm. "Institutional investors need to focus on due diligence, which is going to be the topic 'du jour' in the months ahead, especially in light of recent losses sustained by some funds." In the meantime, hedge fund performance remained sluggish for the third month in a row in August. The Hennessee Hedge Fund Index underperformed the S&P 500, with a +1.21% progression against +2.58% for the broad-based index. It did not fare better than the Lehman Brothers Intermediate Government Corporate Bond Index either, which posted a +1.25% over the month. E. Lee Hennessee, the managing principal of Hennessee Group LLC said that hedge fund portfolios that did not overweight asset allocations to international, opportunistic trading, and technology funds underperformed the Hennessee Hedge Fund Index in August. J.L. |
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