-- Hedge funds say clients can't stomach risk anymore --
By Svea Herbst-Bayliss
BOSTON, April 4 (Reuters) - Hedge fund investors aren't as
brave as they used to be.
The loosely regulated funds, which long relished their
reputations as aggressive traders, are now turning to safer
strategies because their investors are demanding it.
Protesting talk that hedge funds have lost their nerve,
many managers say it is a new breed of client who is curbing
the fast-growing $600 billion industry's itch to put up big
bets.
"Hedge fund managers are still a very competitive and
aggressive bunch," said Philippe Bonnefoy, head of alternative
investment strategies at Commerzbank Securities. "And what they
are saying now is 'I'm not being paid to take a lot of risk.'"
The newly conservative mood reflects both current volatile
market conditions and the new hedge fund investor who isn't
necessarily rich anymore.
Ten years ago, cocktail parties buzzed with talk that
philanthropist George Soros had earned a cool $1 billion after
his hedge fund bet against the British pound. Today, pension
funds celebrate far more modest accomplishments by reporting,
for example, that their hedge funds haven't lost as much money
as mutual funds have.
Managers who once relied on masses of borrowed money, or
leverage, to pump up positions are now playing it safe, ready
to forgo dozens of winning positions to avoid one blowup.
Last year, for example, hedge funds reported a net market
exposure -- the amount they were either long or short in
unhedged positions -- of only 33 percent, down from 58 percent
in 1997 and the lowest level in nearly a decade, new data from
the Hennessee Hedge Fund Advisory Group show.
The mood has soured more this year as managers have worried
about how the war in Iraq would affect the stalled economy. In
the first quarter, hedge funds' net market exposure slipped to
25 percent, said Charles Gradante, a Hennessee Group
principal.
"This is a response to market conditions, which are a bit
unwieldy to trade right now," Bonnefoy said. "People are
worried they may be caught the wrong way and this more cautious
approach to trading went right across the hedge fund world."
Hedge fund managers say the market is so jittery they
cannot find trading partners to let them take on the kinds of
big and sometimes high-risk bets that earned managers like
Soros so much money in the past.
"No one wants to play that game anymore. People are afraid
of losing their jobs and they would rather be safe than sorry,"
lamented one fund manager, who asked not to be named.
Even more instrumental in the industry's make-over,
however, is a new breed of client who wields ever-greater
influence in a fast growing industry in which assets nearly
doubled in the last four years.
Sources involved in the selection process say four pension
funds are ready to each invest $500 million in hedge funds in
the next months, delivering a concentrated infusion of capital
that hasn't been seen before.
But unlike the rich hedge fund investors who once urged
their managers to pursue risky trading strategies that could
deliver triple-digit returns, these clients want a sure thing.
For example when the California Public Employees'
Retirement System, the biggest U.S. pension fund, launched its
hedge fund investment program, its chief investment officer in
2001 said the funds should return 7 percent to 8 percent on top
of Treasury bill yields.
"Hedge funds haven't become kinder or gentler. What we are
seeing is motivated by the demand side of the equation," said
Tim Rudderow, president of Mount Lucas Management, a New
Jersey-based hedge fund with $700 million under management.
"There is an institutionalization of hedge funds and we are
going from a high-net-worth clientele to a retail clientele."
Now, average investors can invest as little as $5,000 in a
hedge fund; and in return, say managers, they want something
they think they can understand. Most often, that means some
sort of stock fund, managers say.
Only 7 percent of all hedge fund assets are now invested in
global macro funds that make big bets on currencies, interest
rates and bonds -- like the one that earned Soros billions --
down from 75 percent in the 1990s, Rudderow said. Now, more
than half of all money is invested in some kind of equity fund
in which managers often try to minimize exposure by offsetting
long and short trades.
But some investors say the days of the aggressive hedge
fund strategies may yet return.
"Perhaps when the market environment is kinder and gentler
you'll see the aggressive kings roam again," Bonnefoy said.
((Reporting by Svea Herbst-Bayliss, editing by Gerald E.
McCormick; Reuters
Messaging:svea.herbst.reuters.com@reuters.net;617 367 4171))
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04-Apr-2003 19:53:12 GMT
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