(September-2003) Don’t get blasé about hedge funds

Delegates at the recent IFSA conference were repeatedly urged to be cautious about hedge funds.

Credit Suisse Asset Management global CEO Michael Kenneally noted that hedge funds “are easy to start up, and there have been a number of people who have left large managers to do so, but they have capacity constraints and in many cases, returns have been much lower than predicted”.

He added that these funds had attracted huge inflows and as such, there is increasing pressure for them to return the double digit returns associated with them.

Goldman Sachs Asset Management’s managing director and global chief investment officer, Gary Black, warned of a potential hedge fund blow-up. “In 1999 and 2000 there were huge variations in valuations and big opportunities to sell losers and buy winners which created value, but if you take a look at the survivor ratio it wasn’t a completely successful strategy,” he said. “Every year the bottom 15 per cent of hedge fund managers disappear, so the bad ones don’t survive, but these are not good statistics for any industry.”

Black added: “They have strayed beyond what they were hired to do and many need people who are disciplined about risk control. A real concern is their small scale and if they all worked to the same standards, that would be fine, but it doesn’t happen that way.”

And Australian Prudential Regulation Authority executive general manager, Charles Littrell, told the conference that hedge funds were not so much an asset class, “as a series of idiosyncratic assetstrategies”.

He said: “It is critical that trustees understand that they may need to undertake considerable work to determine the likely impact of hedge funds investment upon the overall portfolio… If trustees don’t understand hedge funds in the first place, buying a fund-of-funds exacerbates the problem. It is a poor alternative to understanding the investment proposition on offer.”