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Technology Stocks : PCW - Pacific Century CyberWorks Limited -- Ignore unavailable to you. Want to Upgrade?

To: ms.smartest.person who wrote (1050)	4/11/2001 11:25:57 PM
From: ms.smartest.person	Read Replies (1) \| Respond to of 2248

AWSJ: Funds: Hedge Funds Try To Lose Villainous Reputation By KAREN RICHARDSON Staff Reporter Hedge funds could use a little respect, especially in Asia. Public understanding of these funds hasn't improved much since Malaysian Prime Minister Mahathir Mohamad called George Soros an "immoral moron" three years ago, blaming the financier and his hedge fund ilk for setting off the Asian financial crisis. Now, with Mr. Soros's Quantum Fund disbanded after taking huge losses, smaller hedge funds using different strategies are hoping to gain wider acceptance in Asia. But it is a challenge: Many people in Asia associate hedge funds with the 1997 attacks on pegged currencies and tactics that pumped stock-market volatility. "Most people don't understand what hedge funds do," said Matt Dillon, regional manager at ED&F Man Investment Products, which operates several hedge funds with world-wide assets of $5 billion. "There's a huge need for education out there." One change since 1997 is that most of Asia's currencies now float, so there are fewer pegged targets out there to demolish. Still, markets have recently had to learn fast about what hedge funds call convertible arbitrage, one of more than a dozen "alternative investment" strategies that can make big profits for hedge funds but can also leave a smoldering trail of burnt investors. Convertible arbitrage is a strategy in which an investor buys a bond that can be converted to stock while selling short that underlying stock to take advantage of the price discrepancy between the bonds and the shares. A wealth of arbitrage opportunities in a major telecommunications deal last month has given a patina of legitimacy to hedge funds and their strategies, though hedge funds drew some criticism. Take the unloading by Cable & Wireless of its remaining stake in Pacific Century CyberWorks. Underwriter UBS Warburg designed a bond exchangeable for stock to sell to hedge funds and arbitrage desks, persuading Cable & Wireless to go ahead on the premise that short-selling of PCCW stock by hedge funds was preferable to the unmitigated free-fall expected if Cable & Wireless simply tried to dump its PCCW shares on the sagging open market. Such bonds have limits on when they can be converted to stock and at what price. So, according to people close to the deal, the reasoning in this strategy was that sellers -- and presumably any vulnerability -- would be limited to arbitrage specialists because the bond was placed almost exclusively with hedge funds and arbitrage desks. But PCCW's stock fell more than many hedge funds had expected, dropping more than 11% on the day the bond deal was announced. Most market-watchers blamed hedge funds for the price fall, and hedge funds say that is not fair. Although that debate may rage on, it is clear the underwriters targeted hedge funds with the hope they would increase liquidity of the shares and limit downside volatility in a way traditional "long" investment funds -- which don't sell short -- could not. Again, this is because shorting a stock to hedge holding it isn't as immediately disastrous for the stock's price as massive sales. In general, "Hedge funds have gotten blamed more than their fair share," said Ted Lee, chief financial officer at Hong Kong-based Legacy Advisors, which invests in hedge funds. Indeed, not all hedge fund managers are calculator-wielding cowboys who mercilessly short-sell currencies, commodities or derivative instruments in hopes of buying them back cheaper. There are also hedge fund managers who don't hedge at all. Some buy stocks of a company expecting to cash in on an anticipated merger or acquisition, while others specialize in buying securities of distressed or bankrupt companies that they believe are undervalued. ED&F Man Investment's Man-Glenwood multistrategy fund, for instance, employs 14 different strategies and 58 fund managers. U.S. hedge funds, whose performance has little or no correlation with the performance of stock markets, posted average gains of 8% in 2000 (after hefty fees are deducted). This was at a time when Asian indexes fell about 30% and ranked as the worst-performing region in the world, according to hedge fund advisor Hennessee Group. With only about 20 hedge funds controlling about $10 billion in Asia, these small and nimble funds do not benefit from the public relations and marketing departments employed by the traditional "long" funds. Moreover, few hedge funds are authorized for distribution in Hong Kong, so they are often misconstrued there as stealthy operations that operate in the shadows. "The misconception is that we hype volatility. But the fact is that hedge funds actually dampen volatility because they tend to be contrarian and provide liquidity to the market," said Henry Lee, managing director at Hendale Investments Ltd. in Hong Kong, which runs a hedge fund. Market watchers and corporate heads who depict hedge funds as an evil specter bent on decimating share prices, currencies and whole economies for profit paint only a small corner of the picture, industry watchers said. "Putting money into hedge funds and other alternative investments are great ways to diversify a portfolio," said Mr. Dillon. "In the future, fund managers will be criticized if they don't." --- Leading Strategies Equities -- Balanced Long/Short: Sell securities perceived to be overvalued then use the proceeds to buy apparently undervalued securities in order to eliminate risk. -- Either Long/Short: Invest in equities without any commitment to a particular market bias. Can be 100% short or 100% long. Corporations -- Mergers: Purchase shares of companies on the verge of a merger transaction or re-organization. -- Strategic Block: Buy a large block of a company's shares to influence management practice. -- Distressed Securities: Buy securities or debt of companies that are in bankruptcy. Financial Instruments -- Relative Value: Purchase apparently undervalued securities and sell apparently overvalued securities from the same issuer -- expecting spread to narrow. -- Convertible Bond Arbitrage: Purchase a convertible bond and sell the common stock associated with it to profit from a pricing discrepancy. -- Interest Rates: Speculate on the direction of interest rates (fixed-income timing), arbitrage different parts of yield curve (fixed-income relative value). -- International: Look for pricing inefficiencies between nations, focus on emerging markets outside the U.S. Source: ED&F Man -------------------------------------------------------------------------------- URL for this Article: interactive.wsj.com -------------------------------------------------------------------------------- Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved. Printing, distribution, and use of this material is governed by your Subscription Agreement and copyright laws. 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