| Hedge Fund Observer: risky or not, here I come... |
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| 08/01/2006 | |
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It did not take much time for the debate-hungry academics at Edhec Risk, the Nice-based hedge fund research centre of the EDHEC business school, to pick on the conclusions of the Financial Economists Roundtable (FER). The roundtable, made up of 32 US-based economists, said in December that investors were well-advised to look at hedge funds with – at least – some concerns, short of not investing in those vehicles at all. The 32 economists pointed to hedge funds' "high fees, inconsistent data, and difficult to understand risks", all features that could put individual investors at risks. They did not say anything in particular about institutions, but similar concerns have been frequently formulated in the past by financial authorities and pension schemes. Yet, for Mathieu Vaissié and Noël Amenc, two researchers at Edhec, investors need not worry: the FER conclusions are overblown. Rather, reading their release, one could simply be led to a totally different conclusion: hedge funds are riskier than any other traditional investment funds. Regarding the adoption of high-risk investment strategies by hedge fund managers lured by the possibility of a higher remuneration due to their asymmetrical contracts, a feature highlighted by the FER economists, the researchers have a radically different position. "For EDHEC, this does not take into account the fact that hedge fund managers weigh the extra performance that they can expect to generate through riskier strategies with the fact that the value of their own franchise (i.e. reputation) is at stake", they say. Concerns unjustified on the extreme risk front: traditional funds do not fare better, "EDHEC feels that hedge funds should not be stigmatized in this area. The returns of traditional asset classes are not normally distributed either when typical holding periods are considered. If we measure the extreme risks of hedge fund strategies over the last ten years, we find that they are lower than those of equities for the vast majority of strategies." On the other hand, the FER economists would be better off looking at operational issues, says the Edhec. "The FER statement surprisingly overlooks this issue. This is all the more surprising in that operational weaknesses have been shown to play a role in 8 out of 10 cases of hedge fund failures." However, this pep talk about the good sides of the hedge fund industry is unlikely to give much relief. The Edhec hedge fund index* returned only 0.59% in December, still much less than its benchmark, the MSCI world, at 2.08%. J.L. The Edhec hedge fund index is an equally weighed portfolio of five strategies: convertible arbitrage, CTA global, event driven, equity market neutral, and long short equity) |
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