“Recovery Phase has begun”: Pundits

18 May 2009

As we mentioned on Friday, many institutional investors felt somewhat burned by “complex” strategies such as portable alpha last year.  However, research conducted in Q1 seems to suggest that those investors remain positive on one of the key elements of portable alpha strategies – hedge funds.

The FT reported last week on a survey conducted by consultancy CREATE and UK money manager Martin Currie:

“Institutions also remain and real estate, despite the travails of these sectors during the credit crunch, but are wary of “bells and whistles” strategies such as liability driven investment, portable alpha and distressed debt.”

Similarly, the Economist is reporting this week on “the mysterious popularity of hedge funds“:

“…a recent survey of most of the world’s big hedge-fund investors, by Goldman Sachs, suggests that clients remain …a couple of blow-ups aside, hedge funds have proved less risky than most other financial firms.”

And a couple of weeks ago, speakers at the Milken Global Institute were quoted by Reuters as saying things like:

“We are seeing from new investors and from folks who hadn’t been previously been interested [in hedge fund]…”, and,

“There will be in hedge funds and the public pension funds will be leading the charge.”

And just today, the WSJ reported:

“There are signs that “the , he said.”

Price Down – Quantity up

One of the reasons institutions “will be leading the charge” in this “recovery phase” may have something to do with recent fee cuts offered by battered hedge funds.  The FT reports last week that when it comes to fees, “the number of special deals is proliferating fast.”

But don’t say that too loud.  As one hedge fund manager told the FT:

“We have cut our fees for our latest fund, though it would be catastrophic if that got out.”

And this week, the paper quotes the head of the investment fund department at Banque Privée Edmond de Rothschild as saying that fees could be dialled back without putting hedge fund managers on welfare.  Said Rothschild’s Alexandre Col:

“When you see how much money hedge fund managers are making for themselves, they could easily take the fee back to 1 per cent as a maximum.”

Then again, maybe lowering fees won’t work after all.  As Bloomberg columnist Matthew Lynn argued in March:

“The hedge-fund industry was never about price and never will be…there isn’t much point in discount hedge funds.

In fund management, investors have a clear choice: They can place their money with one of the low-cost index-tracking funds, which can be run by just about anyone with a medium-powered personal computer. Or else they can put it with a hedge-fund manager who promises to consistently beat the market.

In making that decision, price isn’t really relevant.”

Search and Recovery

Whatever the cause of the “recovery phase”, it has been met with a sigh of relief by the hedge fund industry.  The only thing we find ominously disconcerting is that after some kind of disaster or accident, rescue workers usually launch a “recovery phase” only after they determine there are no more lives to rescue.

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