Lee, I don't know where I got this date from (probably from the astro site -g-) but I've had June 21/22 as a major turn date and July 5 as a top for about a month now.
posted this on your site but thought it should be here -
Investors Are Flocking to Hedge Funds
Wall Street: As the industry mushrooms, so do concerns
about the freewheeling funds' growing clout.
By WALTER HAMILTON, Times Staff Writer
The stock market plunge of the last year has
spread pain across much of Wall Street. But for one
corner of the investment world, times have never been
better.
Hedge funds, those shadowy investment vehicles
catering to the wealthy, are surging in number and
popularity.
Assets of the lightly regulated investment pools have
almost doubled to more than $400 billion in the last
three years.
And their greatest growth may lie ahead. Experts
predict the industry may expand to many times its
current size in coming years as rich individuals are
followed into the funds by a wave of institutional
investors.
The attraction for those who can afford the price
of admission: Hedge-fund managers pitch themselves as
fast-moving, go-anywhere investors whose goal is to
profit regardless of the markets' backdrop.
That has become a big drawing card for investors
whose faith in a buy-and-hold strategy has been badly
shaken by the stock market's dive.
What's more, hedge funds generally made good on
their promise last year. The average fund posted a 7.6%
gain, compared with the 10% drop in the blue-chip
Standard & Poor's 500 index, according to Hennessee
Group, an investment advisory firm in New York.
With most U.S. stock indexes still in the red this year,
hedge funds' appeal has only increased. The Hennessee
index was up 2.9% through May.
"Many investors are champing at the bit. They
want to throw money in as fast as possible," said
Michael Ocrant, editor in chief of MAR/Hedge, a New
York-based information and data company.
But as the industry mushrooms, so do concerns that
the funds' growing clout may bode ill for investors and
for financial markets.
Individuals and institutions hasty to jump into the
game may overlook the high risks in some of the
industry's more exotic flavors of funds, experts say.
It was less than three years ago that the
industry--and global markets--were rocked by the fiery
meltdown of Long-Term Capital Management, a hedge
fund whose huge bond-market bets went awry.
Even for lower-risk hedge funds, returns could prove
to be disappointing because so many new funds are
piloted by inexperienced managers, some industry
analysts warn.
"Occasionally, I see managers [where] I'm amazed
anybody gives them a dime," said Bill Knight, managing
director at Pacific Alternative Asset Management Co. in
Irvine, which invests in hedge funds on behalf of clients.
Hedge funds have been a part of the Wall Street
landscape since the 1960s, but it wasn't until the 1990s
that they began to proliferate, in part thanks to the
renown of such legendary managers as George Soros.
Officially, hedge funds are investment vehicles that
pool the assets of clients, similar to how mutual funds
blend investors' money. Though some newer hedge
funds require minimum investments of $100,000 or less,
most demand much more than that to get in.
While mutual funds are designed to be transparent to
the public--and to financial regulators--hedge-fund
managers long have had an almost maniacal attitude
about secrecy. Most shy away from press interviews,
for example.
The penchant for privacy stems in part from the
funds' often fast-paced trading: Because success may
depend on a nimble response to shifting market trends,
hedge funds seek to shield their moves from rivals that
might try to beat them to the punch.
Also, hedge funds are prohibited from advertising, so
managers fear that dispensing too much information
may cross securities regulators.
Because they're private partnerships catering to
well-heeled investors, hedge funds generally are free
from government oversight. As long as investors meet
net worth and other qualifications, regulators take a
largely hands-off approach.
The lack of regulation has furthered a daredevil
image of the hedge-fund business that fund experts say
is inaccurate. Some funds, in fact, are designed
specifically to generate modest returns while protecting
against major losses.
Still, the freedom that hedge-fund managers enjoy in
their investing has paid off in the last year. For example,
many have profited from selling stocks "short," a bet
that share prices will fall in value.
Mutual funds, by contrast, are largely constrained
from shorting and have been stuck doing little more than
waiting for the market to rebound.
The prospect that the heady bull market of the 1990s
is giving way to a long period of doldrums for stocks has
caused more investors to turn to hedge funds with at
least a portion of their capital.
At the same time, some of Wall Street's most
talented people are opening hedge funds--causing a brain
drain from the mutual fund industry, which at $7 trillion
in assets so far dwarfs the hedge fund business.
One of Fidelity Investments' top mutual fund
managers of the last two years, David Felman, this
month left the firm's Mid-Cap Stock fund to join new
hedge fund Andor Capital Management.
Even by the Wall Street's inflated standards, money
managers can make far more money running hedge
funds than mutual funds.
Hedge funds typically charge an annual management
fee of about 1% of assets, compared with about 1.5% at
mutual funds. But there's a kicker for hedge-fund
managers: They usually keep 20% of any profits they
generate.
The result is that hedge-fund managers' pay can far
outdistance the $436,500 median salary of stock mutual
fund managers, and the salaries of pension fund
managers.
The two men running Harvard University's
endowment said this month they were leaving to form
their own hedge fund even though one of them made
$7.3 million last year while the other earned $8.7
million.
Hedge-fund managers justify their pay by noting that
they make money only when clients do: Typically, a
fund that loses money one year must get back to even
before the manager earns a dime.
"There's certainly something to be said for
hedge-fund managers only being paid if their investors
make money," said David Dali, co-head of OneWorld
Investments, a Boston-based firm that started an
emerging-markets hedge fund in late 1999.
Yet some observers fear it simply has become too
easy to set up a hedge fund and attract large sums from
return-hungry investors who may not understand the
risks.
Fewer than half of today's 4,800 hedge funds existed
six years ago, Hennessee Group estimates.
Even some hedge-fund managers are surprised that
they're getting backing.
"Quite frankly, I shouldn't be able to start one up,"
said one manager with just four years on Wall Street.
In some cases, hedge-fund managers run little more
than glorified mutual funds but charge hedge-fund fees,
critics say.
"In the late '90s, there were kids who had barely
learned to shave who started hedge funds as a way to
charge exorbitant fees to people who should have
known better," said Alan Beimfohr, a principal at
Knightsbridge Asset Management in Newport Beach,
which runs a small hedge fund.
Though many experts dismiss the possibility, one
concern is that the explosive growth of hedge funds
raises the risk of a market disaster triggered by
unexpected losses at one or more funds.
"It's like everything else in the market. It won't
happen again until it does," said Ocrant of MAR/Hedge.
"Before Long-Term Capital Management happened,
everyone said it couldn't happen."
Indeed, hedge funds entered the public
consciousness with the 1998 collapse of Long-Term
Capital Management.
Headed by trading legend John Meriwether, LTCM
was run by a constellation of Wall Street stars. But a
series of ill-fated bond-market bets, which were
exacerbated by the use of enormous leverage, crippled
the fund in September 1998 and threatened a domino
effect of losses at investment firms to which LTCM
owed money.
Fearing the potential for global market fallout, the
Federal Reserve Bank of New York engineered a
$3.6-billion bailout of LTCM by major investment
banks.
In the wake of LTCM, there were calls for greater
regulatory scrutiny of hedge funds. But the effort was
stymied when a bill proposing greater financial
disclosure by large hedge funds died in Congress.
The only notable change since LTCM, experts say,
is that regulators now keep a tighter watch on bank
lending practices to hedge funds--an effort to prevent
the massive leverage that doomed LTCM.
The hedge-fund industry today paints LTCM as an
anomaly. Although the use of borrowed money can
boost hedge funds' financial clout well beyond the
$400-billion asset base, many funds say they use little or
no leverage.
In fact, as the name implies, many funds say their
goal is to hedge their clients' bets, limiting the risk of
significant losses.
"The majority of hedge funds in existence today are
not involved in the types and amount of risk that
Long-Term Capital was involved in," said Ignacio Sosa,
co-head of OneWorld Investments, a Boston-based
hedge-fund firm.
In contrast to the so-called macro funds of the past,
which made huge bets on trends such as currency
movements and interest rates, many hedge funds are far
more tightly focused.
Many hedge funds also are becoming more open
about their activities because the composition of their
investors is changing.
Traditionally used by the wealthy and by
endowments, hedge funds now are seeing rising cash
inflows from pension funds and other institutional
investors. The newcomers demand more detailed
information and pay close attention to the risks that fund
managers take, experts say.
But the majority of dollars invested in hedge funds in
2000 still came from wealthy individuals, according to
Hennessee Group.
Wealthy investors are parceling greater amounts to
hedge funds in part because mutual funds and individual
stocks no longer carry the same bragging rights, experts
say.
"Particularly for individual investors, there's a certain
cachet to being in a certain hedge fund," said Bruce
Ruehl, chief investment officer at Tremont Advisers, a
Rye, N.Y. investment consulting firm. "There's
definitely a lot of cocktail-party benefit."
Yet, despite strong returns for many hedge-fund
categories in 2000, the industry had its share of bombs.
Of the more than 500 funds that Hennessee Group
tracks closely, 15 lost more than 40% last year,
including three that shed more than 60%.
Even the savviest hedge-fund managers have been
tripped up by erratic markets in recent years.
Julian Robertson, head of Tiger Management, exited
the business last year after his resistance to technology
stocks badly dulled the performance of his funds.
Conversely, the Quantum funds run by George
Soros, who gained fame in 1992 by making $1 billion
betting against the British pound, were hit hard last year
by staying too long in tech shares.
The Securities and Exchange Commission has
brought charges against a handful of funds in recent
years for fraud, often alleging that managers siphoned
off investor assets to buy homes and cars.
But the greater threat to investors, experts say, is in
the same wide strategy leeway and lack of regulatory
constrictions that make hedge funds so attractive in the
first place: Can novice managers adequately control the
risks they're taking, particularly if they're trying to
rebound from a period of losses?
"The temptation is to do things you didn't intend to
do when you started out," said hedge-fund manager
Beimfohr. "You're under incredible pressure to perform
and you think, 'Gee, I'll just do this one crazy trade. I
think it'll work out. No one will ever know.' "
* * *
Staff writer Walter Hamilton can be reached at
walter.hamilton@latimes.com.
* * *
Hedge Fund Boom
Hedge funds, which can invest across the broadest
spectrum of financial markets, have exploded in number
since the early 1990s as more wealthy investors and
institutions have sought to diversify their bets.
Total number of hedge funds, January of each year
January 2001: 4,800
Source: Hennessee Group
A Sampling of Fund Strategies and Returns
Hedge funds can follow a wide variety of investment
strategies. Here are some of the more popular:
Macro: Among the riskiest of all investing styles,
macro funds make bold bets on broad market trends,
such as currency-price shifts. Long favored by star
managers such as George Soros, the strategy has been
less profitable in recent years and has fallen out of favor
with younger fund managers.
Short selling: These funds aim to profit specifically
from falling share prices. Short selling involves
borrowing shares of a company and selling them, hoping
to replace them later with stock bought at a cheaper
price.
Market neutral: This strategy entails buying stocks of
some companies for potential gains--a "long" bet--while
selling short the shares of other companies the manager
believes are overvalued. The goal is to produce steady
returns with relatively low overall risk.
Convertible arbitrage: These funds make a two-sided
bet. They buy a company's convertible bonds (which
are convertible into stock at a set price) while selling
short its stock, in an attempt to profit from temporary
market pricing inefficiencies. Convertible-arb funds rely
on heavy leverage to magnify returns because they tend
to earn only tiny profit on each trade.
Merger arbitrage: Funds using this strategy buy the
stocks of companies that are takeover targets, while
selling short the shares of the acquiring companies. The
goal is to profit from the fluctuating difference between
the target's market price and the price the acquirer
eventually pays. A profitable strategy in the past, it has
been less so lately because of the falloff in merger
activity in the weak economy.
Average Returns by Fund Strategy
Here are average returns for key types of hedge
funds in 2000 and the annual average for the period
1990-2000, net of fees charged. Many funds earned less
in the 1990s than the return generated by simply buying
and holding the Standard & Poor's 500 index stocks.
But that changed in 2000 as stocks tanked.
Source: Hennessee Group
Hedge Fund Assets Each Year
In billions of dollars; figures are for January of each
year
2001: $408 billion
* * *
Who Hedged in 2000
Sources of money invested in hedge funds in 2000,
by investor category:
Individuals: 55%
Funds of funds: 16%
Corporations: 14%
Pension funds: 8%
Endowments/foundations: 7%
Source: Hennessee Group
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