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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Mannie who wrote (46331)	1/14/2002 11:58:29 AM
From: stockman_scott	Respond to of 65232

Chet Currier: Hedge funds to face risks by playing in public arena Wider market would mean wider scrutiny The Dallas Morning News 01/14/2002 By CHET CURRIER NEW YORK – The mischievous gods of coincidence had some fun the other day at the expense of hedge funds. They arranged for the simultaneous appearance of two news stories that made, shall we say, an awkward couple. The first, in the Wall Street Journal, said these exclusive partnerships for wealthy investors want to broaden their market, and are willing to subject themselves to "increased public scrutiny" in exchange for regulatory clearance to do that. The second, a Bloomberg News story on investment performance for 2001, was headlined "Hedge Funds Barely Match Returns of Treasury Bills." The funds' average gain for the year came in at about 4 percent, compared with 4.4 percent on Uncle Sam's ultra-safe three-month bills. Reading the Journal story, my first thought was "risky trade." Hedge-fund operators would have to gain an awful lot of new business to justify what it might cost them if they compromised a valuable asset – their mystique. The second story only served to dramatize the slings and arrows that increased exposure might bring. Different game Mutual-fund managers, who have long labored in a fishbowl environment, get pummeled regularly for their collective inability to beat the market indexes. Hedge funds, not subject to the same disclosure requirements, have mostly escaped that kind of examination, aided by a scarcity (until recently, at least) of widely publicized gauges of their performance. It's a heterogeneous species. The single label "hedge fund" is applied to vehicles that range from swashbuckling short-sellers in the stock market to risk-shunning arbitrageurs specializing in niches such as convertible bonds. To hedge, in its original financial meaning, is to protect oneself by offsetting one risk against another. There are innumerable ways to apply that principle in practice – or to stretch it, as the case may be. Semantics aside, many people suppose that something inherent in hedge funds makes them better than mutual funds. Hedge-fund managers usually have greater freedom to maneuver, after all, and the pay incentives are often juicier. Anecdotal evidence sometimes gives this perception added credence. Recall the tale of Jeff Vinik, a prominent mutual-fund manager who went on to greater glory when he left Fidelity Investments in 1996 and started a hugely successful hedge-fund firm. At the height of the Internet boom we heard all the time about technology-stock managers leaving mutual-fund firms to join or start hedge funds. Greener pastures, everybody said. The aura hasn't succumbed to the crackups that occur from time to time in hedge funds' high-risk world. The most famous of these, a drastic loss at Long-Term Capital Management LP, made headlines scarcely more than three years ago. Hedged with hype? Sure, the markets are full of opportunities of the sort academic researchers call "inefficiencies." But these openings tend to get narrower and narrower, to the point of disappearing altogether, as more people try to exploit them. That's the way markets work. Occasional efforts so far to bring a hedge-fund-style approach to mutual funds haven't met with great success. One thinks of RS Investments' celebrated Contrarian Fund in San Francisco, which suffered through back-to-back losses of 29.5 percent in 1997 and 32.5 percent in 1998. At last report by Morningstar Inc. it had assets of $67 million, down from a mid- 1990s peak of more than $1 billion. Let's be open-minded. Hedge funds for the masses may deserve a broader trial than they've been given to date. The chances of success won't be good, though, unless the product is sold to investors with a clear understanding of what they're getting into. Otherwise, there's all-too- obvious potential here for an ugly cycle of hype and disillusionment. _________________________________ Chet Currier is a Bloomberg News columnist.