More tinder, more debt fuel, more, much more ...
cbs.marketwatch.com
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Can't see the forest for the hedges
The hedge fund frenzy makes for risky investments
By Thom Calandra, CBS MarketWatch
Last Update: 4:33 AM ET July 2, 2001
LONDON (CBS.MW) - The demand for performance-enhancing hedge funds is sparking a gold rush of sorts to the industry, not so long ago scarred by the tremendous failure of American hedge fund Long Term Capital Management.
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Once hopelessly stuck in backwaters, silver-haired investment trusts, pension funds and other risk-averse institutions are seeking the hedge edge. For some, the decision to seek a market advantage, and with it a few extra percentage points of performance, will prove to be brilliant.
For others, caught in the hedge-fund frenzy, the move toward greater risk via an alternative investment vehicle is bound to end in disappointment -- and maybe even disaster.
Hedge funds worldwide this year will see their assets swell. The amount of money that came into hedge funds in this year's first three months, about $9.7 billion, nearly equaled contributions for all of last year, Tass Research reports. A London newsletter, Eurohedge, says 104 hedge funds opened their doors last year across Europe. Even more are expected this year.
The numbers are just as shocking in the U.S., Canada, Tokyo, Paris, Frankfurt and Hong Kong.
Massive investors such as Calpers in California, one of the largest public pension funds in the world, are looking to sink as much as $5 billion into the hedges. After all, managers everywhere want to put their money to work after 15 months of first turmoil, then range-bound trading for stock, bond and currency markets.
Returns from stocks and bonds have declined sharply in the wake of the tech tumble that began in March 2000. Yet those who are sitting on trillions of cash from a 10-year bull market want some spice in their lives. Hedge funds, which claim expertise in derivatives, emerging markets, futures, short-selling and complex bond and merger arbitrage, are the spice.
Of course, an institution like California Public Employees' Retirement System would hardly call its decision a risky one. The $5 billion, if fully invested in hedge funds, would equal only 3.3 percent of its $151 billion of assets.
Still, companies, pension funds, centuries-old trusts and even investment banks, wary of their own far-flung trading desks, are turning to hedge funds in record numbers. So are private investors with millions to spare.
Traditional fund managers, like veteran Mark Holowesko of Franklin Templeton (BEN: news, msgs, alerts) , have left their mutual funds to direct new hedge funds, mostly because hedges offer portfolio managers more fiscal freedom and greater fees if the managers succeed.
The professionals, in other words, are mostly acknowledging that it is getting tougher in the plain-vanilla world of stocks and bonds to beat the averages. Even high-flying Nasdaq is proving finicky, failing to deliver robust returns to all but the best, or luckiest, stock pickers.
It's a slam-dunk that some of these new hedge funds won't provide investors with a hedge against downside risk at all, as hedge funds were originally designed to do 40 years ago. Instead, in the search for those extra few percentage points of yearly return on their billions, some hedge funds will fail miserably, as Long Term Capital did three years ago.
As some careful investor, perhaps Warren Buffett, once said, When the tide goes out, we'll find out whose been swimming butt-naked.
Skinny-dipping, anyone?
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