|
|
ABOUT
GREYCOURT
|
News and Events
Home : About Greycourt : News and Events
October 9, 2005
Greycourt CIO Friedman Discusses Hedge Funds in New York Times
Does 'Hedge Fund' Mean Anything Anymore?
By M.P. DUNLEAVY Published: October 9, 2005
THERE'S nothing like hearing about a hedge fund manager making hundreds of millions
of dollars a year to raise that old, perplexing question: What the heck is a hedge fund and what do these people do, anyway?
Don't blame yourself if you're a little unclear on these points. In the last half-century, hedge funds have enjoyed a certain can't-touch-me status - and even those who invest in them
often don't know how they operate. Hedge funds aren't subject to much regulation by the Securities and Exchange Commission; that freedom has contributed both to their macho mystique and to fund managers' license to
deploy whatever strategies are necessary to deliver the megareturns their wealthy clients have come to expect.
Traditionally, that lack of transparency has been a more-or-less accepted part of the equation
for both investors and federal regulators, but times are changing. An explosion in the number of hedge funds and in the money pouring into them has increased anxiety about their potential risk. Current scandals
involving the Bayou Group in Connecticut and the KL Group in Florida, in which scores of millions of dollars are unaccounted for, haven't eased concerns - especially now that hedge funds are being made available to
less affluent investors.
While new regulations will require some funds to register with the S.E.C. early next year, the opaque nature of the business means that it still pays for even a basic investor to know
how hedge funds work.
The earliest hedge funds, created more than a half-century ago, were actually formed to hedge against risk. There was a small group of investors with a big pool of money, which was
leveraged and then invested in equities in both long and short positions. By shorting stocks, managers could cushion the portfolio if the market dropped, while still reaping gains elsewhere when it rose. That way,
in theory, "one side of the balance sheet hedged the other," explained Grover Cable, risk and fund manager at Franklin Street Partners, an investment firm in Chapel Hill, N.C., with $1.2 billion under
management.
Depending on how much leverage was involved, a skilled manager using this strategy could deliver extraordinary returns with relatively low risk, Mr. Cable said, which is why even today the
long-short equity strategy is still most popular.
Over the years, the quest for supersized returns has led managers to develop other strategies. And today's crowded investment field has brought even more
pressure to deliver standout profits. The number of hedge funds has mushroomed to about 8,000, with about $1 trillion invested in them, according to Hedge Fund Research, a database that tracks hedge fund
performance.
The fees imposed on investors by hedge funds could shrink your shorts: an incentive fee of 20 percent of the fund's profits, as well as a management fee of 1 to 2 percent. And some charge even
more. When investors are paying fees like that, of course, a conservative bondlike return of 4 percent a year just won't cut it.
That's why the cowboy image of these fund managers isn't a myth. There are two
parts to the return on any investment, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago, which oversees $44 billion in assets. The first part comes from exposure to the market itself,
known as beta. The other part, which comes from the skill or luck of the manager, is known as alpha.
Hedge funds are all about alpha - using the talent, cunning and skill of the fund manager to make trades
that will outfox the market time and again. "Hedge funds are a vehicle that isolates the skill of the manager from the beta of the market," said Greg Friedman, chief investment officer at Greycourt &
Company, a private-investment consulting firm based in Pittsburgh with $5 billion to $6 billion in assets under advisement.
In recent years, many managers have found astonishing ways to extract profits from
all kinds of markets and market conditions - a skill often referred to as "exploiting market inefficiencies." That means trading not only stocks, bonds and commodities but also dealing in innumerable types
of arbitrage. (Volumes have been written on these supposedly riskless transactions.).
The trouble, some experts say, is that some managers may be playing a little too fast and loose with their investment
strategies - adding to a fund's overall risk, not hedging it.
 Back to News and Events
|
|
