| Hedge fund investors headed for disappointment |
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| 03/04/2005 | |
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After a slow start of the year, hedge funds are slowly creeping back into positive territory, but might soon bump into new problems. The asset-weighted version of the MSCI Hedge Fund Index returned 1.27% in February - still below the MSCI World Equity Index, which earned 3.17%, or the S&P 500 at 2.1%. Most strategies of the Edhec Hedge Fund Indices also made a comeback in February after continuing their 2004 slide in January. According to Edhec, a business school, there were less strategies lingering in the red or close to 0. Emerging markets, one of the best performing strategies, returned 3.44% in February after earning a dismal 1.03% in January. But for some analysts, the 2004 global fundraising of €150 billion that left hedge funds assets at €1 trillion at the end of last year should prompt investors to raise some questions before jumping into the hedge fund bandwagon. Years of powerful and unrelenting alpha generation regardless of market conditions might be something of the past. According to Watson Wyatt, the investment consultant, up to 1000 new managers join the global hedge fund industry each year, but only 50 of them are skilled enough to achieve success. At this time, the consultancy estimates between 300 to 600 the number of hedge fund managers that can bring added value to investors, with US$75 billion to US$150 billion of capacity left among them. Ups and downs For Alexander Ineichen, an analyst at UBS, if the 180 basis points plunge in the second quarter of 2004 was deemed as a catastrophe by some investors, "then there is certainly room for disappointment going forward." Far from being a Cassandra, Alexander Ineichen refrains from comparing the strong hedge fund inflows as a bubble in formation. "We believe the main characteristic of a bubble is mispriced assets. With respect to hedge funds, this seems not to be the case. Hedge funds are asset managers, not assets", he says. Though it might not be a traditional bubble, it might nevertheless still be enough to fail the expectations of the investors desperately searching for more alpha. "Expectations of future hedge fund returns could be.as possibly with every other investment historically (real estate, equities, tulip bulbs, etc.) too high, and potentially a source of disappointment", says Alexander Ineichen, adding that the investment management industry was undergoing deep changes and that "progress is normally not a gradual endeavour, but an erratically jumpy one." J.L. |
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