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November 28, 2005
Hedge funds make markets more efficient
Speaking at a press briefing in London today, Francois Barthelemy, manager of the F&C Fund of Hedge Funds, challenged some of the myths surrounding the hedge fund industry. According to Barthelemy, hedge funds are criticised for their opacity and lack of transparency when, in fact, they tend to make markets more efficient. Whilst they are perceived as risky, their diversification effects reduce the investment risks contained in a balanced portfolio.
“There is a view that hedge funds destabilise markets, but, in our opinion,” he explained, “they usually make markets more efficient. Their ability to exploit a wider range of investment techniques and instruments allow them to extract value from investment opportunities that can be overlooked by traditional investors.”
“For instance, a company going through a bankruptcy process, such as Delphi in the US, will usually be shut from accessing traditional capital markets. Hedge funds have the flexibility to step in and, after conducting in-depth analysis, they can provide the financing needed for the business to carry on. These opportunities are typically executed at advantageous terms as they are ignored by most investors. This is where hedge funds add value”.
’Hedge fund’ is a term much used and abused so it’s worthwhile trying to define exactly what it means. He continued: “Hedge funds enjoy a high level of flexibility to use a wide range of strategies involving the use of derivatives, short selling and leverage in the pursuit of enhanced absolute returns while managing risk at the same time. They usually have a low correlation to equity and bond markets, particularly in falling markets.”
Growth in the market over recent years has been fuelled by the desire for absolute returns and uncorrelated assets by investors and the desire of investment managers for more flexibility, less regulation and the ability to earn performance fees. Hedge funds are certainly not new, though. Alfred Winslow Jones, who in 1949 employed a long/short investment strategy, is generally credited with having started the first hedge fund. The sector grew rapidly from the 1960s onwards yet the investment styles, and the strategies and tools with which to implement them, have changed over the years.
Hedge funds have continued to provide good absolute returns with low volatility even as they have grown rapidly. The hedge fund industry is currently estimated at around $1 trillion invested in some 8000 funds (source: Cazenove). Strong growth over recent years - the compound rate of growth in Assets under Management is around 30% p.a. over the last 15 years (Source: Hedge Fund Research, Inc, The Barclay Group, Hennessee Group and Man Plc, as at March 2005) - shows that the model of high asset base, low margin is not the only strategy for asset managers. Clients are prepared to pay high fees for good absolute performance.
-ISIS Asset Management-
Posted by su at November 28, 2005 9:55 AM