Hedge funds the way to go

CHANNEL NEWSASIA

They tend to make money whether markets go up or down, say experts

Frederick Lim

frederickl@channelnewsasia.com 

THE severe market dislocations, seen in the wake of the collapse of US investment bank Lehman Brothers last September, have created a wealth of investment opportunities.

And this is especially so for hedge funds, said UBS Wealth Management.

UBS believes the panic selling in financial markets over the last few months has resulted in many assets being mis-priced.

“Mis-pricings are exactly what hedge fund managers look for,” said Mr Timothy Bell, Global Head of Hedge Funds Advisory at UBS. “They are not interested in securities they think are fairly valued. They are looking for securities that are either substantially over-priced or under-priced and looking to profit as those securities come back to their fair value.”

But UBS said that, despite the opportunities, traditional funds are holding back from investing due to risk aversion as they typically prefer to see some stability on the horizon before entering the market.

For investors looking to diversify their portfolio, some analysts recommend investments in hedge funds to take advantage of their perceived ability to generate returns regardless of market conditions.

They said hedge funds tend to make money whether markets go up or down.

“To a hedge fund, it’s mainly about taking advantage of pricing inefficiencies, and it doesn’t matter if markets go up or down or sideways,” said Mr Patrick Fauchier, chairman of Fauchier Partners, a leading European Fund of Hedge Funds manager.

“When you put money with traditional fund managers, you are betting on the average of the market. The average of the market may not move for quite a while. That’s why I believe that there is a competitive edge being invested with hedge fund managers,” he said.

Like other investors, hedge funds have also been hit by the turbulence in the global financial markets, but the impact has been relatively less severe.

Hedge funds have lost only about 20 per cent of their investment value, compared with he 50-per-cent losses suffered by traditional equity funds.

But, according to UBS, assets managed by global hedge funds are estimated to have shrunk by as much as 35 per cent to US$1.2 trillion ($1.8 trillion) last year from a peak of US$1.9 trillion in 2007.

Given the competitive environment, some analysts expect smaller players to fold, which they say could be positive in the longer term.

“Basically what we are seeing now is consolidation amongst the weaker participants,” said Mr Thomas Della Casa, head of research of Man Investments, a US-based hedge fund manager.

“I think this will make our industry much stronger and there will be many more quality players in that sector looking forward than in the past.”

So is it a good time to invest in hedge funds? And which type of hedge funds do the experts recommend? For the answers and other investment ideas, catch Money Mind this Sunday at 9.30pm on Channel NewsAsia.

From TODAY, Business – Friday, 10-April-2009