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Hedge funds U-turn on real return promisesPosted by Retirement on: 2005-09-16 12:36:05 in category:
Investments [ Print | Permalink / 0 Comment(s) ] By Pratima Desai NEW YORK (Reuters) - For years hedge funds have used the promise of real returns to lure investors, but that sales pitch is now under threat, speakers at the Reuters Hedge Fund Summit said this week. Hedge fund analysts say some managers are being forced to abandon the idea of real or absolute returns as they struggle to meet investor expectations and look for alternative ways to measure their performance. Many managers are now turning to relative returns based on benchmark stock, bond or hedge fund indices. Analysts say the move toward benchmarking is going to split the hedge fund industry into those who can provide real excess returns and those who can only offer market returns. "There is a bifurcation going on right now in the hedge fund business," said Jane Buchan, chief executive officer of Pacific Alternative Asset Management Co. Weak or negative returns from many hedge fund trading strategies over the past 18 months have meant that many managers have been unable to beat targets -- and so have not been able to collect performance fees of around 20 percent. With severely reduced incomes, many hedge funds have opted to concentrate on attracting institutional money, which regardless of performance, can earn between 1 and 2 percent in management fees. "There is a move toward (indexing) because there is a transition ... to trying to gather assets and beating an index," said Mark Yusko, president and chief investment officer of hedge fund firm Morgan Creek Capital Management. "I'm not sure I like that trend ... When a lot of money comes into the business ... excess returns go down." The worst problems have been in relative value strategies that buy and sell mispriced assets against each other on the expectation that prices will eventually return to their fair values. Problems for managers in relative value strategies include lack of stock market volatility, which creates mispriced assets, and too much money chasing too few opportunities. Hedge fund assets have doubled to around $1 trillion since the 2000 equity market crash. Much of that new money has come from institutions like pension funds looking for absolute returns, capital preservation and diversification. However, the shift away from absolute returns is also partly a response to pension funds that want to measure performance. "As long as you don't underperform an index by too much, you get to keep the money," Yusko said. Institutions usually do not pull money out unless there is a threat of a prolonged period of underperformance, whereas wealthy individuals are quicker to act; and recent poor hedge fund performance has prompted many of them to withdraw money from hedge funds, industry executives say. Among the hedge funds that are moving toward relative returns, some are using stock or bond market indices. Others are using hedge fund indices, which analysts say are probably a better comparison. "They compare themselves to a benchmark, which is an absolute return benchmark," said John Paulson, founder of hedge fund Paulson & Co. Many say hedge fund indices can really only be used to measure the performance of relative value strategies, which rely on computer-generated models and market trends. These strategies are seen as less risky and are preferred by institutional investors. The current shift toward relative returns is likely to put downward pressure on performance and management fees as market returns can be earned by investing in indices which cost a fraction of the amount hedge funds charge. "Our clients are large institutions who can effectively get any index return they want," Buchan said. "Why would they pay fees for beta (market returns)? It makes no sense." Homepage Please support are sponsors. To design you custom retirement plan. http://www.retirement-plan.us For planing a IRA rollovers. http://www.ira-rollover.us Professional asset allocation and the wonders it can do. http://www.asset-allocation.us Professional money management: National ranked performance. http://www.roth-ira.us Managers selected to fit your needs. http://www.money-managers.us |
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