Magazine article The Spectator

Hedge Funds Are Not for Novices

Magazine article The Spectator

Hedge Funds Are Not for Novices

Article excerpt

These days, hedge funds are what every investor wants to own and where every alpha male (and some alpha females) now want to work. In the City, the hedge fund industry is fast replacing investment banking and commercial law as the surest perceived path to wealth, a good marriage and social bragging rights. Hedge funds now even boast their own annual two-day festival, Hedgestock, named somewhat self-consciously after the Woodstock festival of 1969 and this year featuring an outdoor concert by The Who. This produced, according to the Times, a splendid moment of unintended comedy when Pete Townshend - he of the smashed guitar routine in days gone by - became so maddened by relentless interruptions from the assembled moneymen that he was reduced to futile shouts of 'Turn yer mobiles off!'

There's no doubt that hedge fund business has been growing very fast. In 1990 there were about 500 hedge funds, with combined assets of about $50 billion - peanuts in the context of the global investment industry. By the end of last year the number of funds had grown to 8,000 and the amount of money invested in them to an estimated $1.2 trillion. The odd thing about this growth is (notes Barton Biggs, former Head of Research at Morgan Stanley in New York) that most people still have virtually no idea what hedge funds are or do.

In fact, 'hedge fund' is a generic term that describes a variety of different investment styles with only two things in common. One is that, unlike conventional funds such as unit trusts, which profit from picking investments that subsequently go up in price, hedge funds aim to make money in both rising and falling markets. The second is that they charge very high fees, typically 2 per cent of the value of the fund each year, plus a 20-25 per cent share of any profits made. (One sceptical American business school professor describes hedge funds as 'a fee structure with an investment strategy attached').

Until recently, most hedge funds preferred to keep what they were doing hidden from public scrutiny, which inhibited understanding of how they operate. Those who could invest in hedge funds were wealthy individuals prepared to lock up their money for a year at a time and exempt themselves from the protection of financial regulators.

That is now starting to change. Regulators have begun to take a more relaxed view about exposing investors to such opaque investment vehicles, and financial firms of all kinds have been lobbying hard for permission to cash in on such a potentially lucrative business. …

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