Harmless Hedge Funds Preach Conservatism

Financial News, January 4, 2004 | Go to article overview
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Harmless Hedge Funds Preach Conservatism

Byline: Anuj Gangahar

"Above all, do no harm." The Hippocratic oath is not the first thing that springs to mind when thinking about the hedge fund industry. While medicine men through the ages have sworn by their pledge, hedge fund managers have adopted a rather more aggressive stance when plying their trade.However, hedge funds using "do no harm" as their main selling point are becoming common as the industry seeks to attract funds from conservative investors.

In the investment mainstream, trust is everything. Hedge funds anxious to attract investment are stressing their stringent risk management procedures and conservative philosophy, rather than boasting of outlandish performance figures. One reason may be that there has not been much to boast about in the past few years. Gone are the days of double-digit returns as a matter of course across all strategies. Indeed, funds with a dedicated short bias - those that probably best fit the accepted definition of hedge funds - have seen returns plunge by 30% in the past 12 months with little relief in sight in 2004.

Capacity is the driving force behind the switch to a more careful approach. Wealthy individuals and family offices, for so long the main investors in hedge funds, have been convinced of the merits of the strategies for ages. However, potential investors from this group are few.

The hedge fund market's future instead depends on convincing conservative trustees of pension funds and endowments that investing is wise. These trustees are not impressed by the promise of outlandish returns. They prefer safety at all costs. If they make a little bit of money along the way, that is alright, but it is not the be all and end all. That distinction goes to the conservation of wealth.

"We don't make a huge amount of money but we will be careful about what we do and we won't blow up and lose your hard-earned cash," say new-generation hedge funds.

This is the sales pitch that hedge fund investors will hear time and again this year as the avoidance of risk becomes the industry's central pillar of faith.

Regulation of hedge funds was the big story of 2003. Across the globe, regulatory authorities grappled with the question of the best way to police the market without stifling its creativity. This year, William Donaldson, chairman of the US Securities and Exchange Commission, will be faced with the unenviable task of deciding whether to pass a law requiring US hedge funds, and foreign funds active in the US, to register with the SEC. If, as expected, this legislation goes through, smaller hedge funds could struggle to meet the administrative burden. Many could go out of business. Thus Donaldson has the power to speed the migration of hedge fund business away from smaller managers.

However, Tom Brown, head of UK investment management at KPMG, the consultancy, said: "There is no danger of the industry being regulated out of existence - the overall trend is one of opening up. In jurisdictions such as Germany, Luxembourg, Ireland and the UK, for example, regulators are becoming more hedge-fund friendly."

Virginia Parker, founder and chief executive of Parker Global Securities, a US-based fund of hedge funds firm, said more hedge funds and fund of hedge funds would become registered investment advisers, as she believed the SEC would impose this requirement this year.

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