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Hedge Funds See Brighter Year Despite Vulnerable Equities

“I do believe hedge funds will do very well this year. Many are frustrated with hedge funds, but in the state of panic everyone was put through, I think we should look at the facts in a quiet and calm way,” Laurent Seyer, chief executive officer of Lyxor Asset Management said at the recent Middle East Alternative Investments Roundtable.

Hedge funds activities stalled, with assets under management roughly at $1.8 trillion dropping worldwide by an average of 20 per cent last year, but the equities markets fared worse and fell nearly 50 per cent, Seyer said.

“The performance of hedge funds last year was I’d say an all-time low, but it was not as bad as other asset classes. I don’t think we should rule out hedge funds altogether.”

Seyer however, conceded that 2009 will be a tough year in terms of investments, particularly as equity markets are extremely irrational and will last for some months before stability is restored. Top that with low interest rates and expensive bonds which make it difficult to find a way for investors to park their money and get decent returns.

For most hedge funds, the major issue last year was not so much about the inability of many companies to pay back their investors, but the fact that they had to apply restrictions to the liquidity of their funds.

“That was to me the big deal, many were sitting on an enormous amount of cash but it was cash that couldn’t be put to work because of this unprecedented risk aversion. There is no reason to stay out of hedge funds,” said Leon Cooperman, chairman and chief executive officer of US-based Omega Advisors. Cooperman’s company manages assets of about $6 billion.

“This is the worst environment that I have ever experienced. Such downturns are cyclical, but last year, fear was dominating greed,” said Cooperman, adding that investors’ mindset was transfixed on the Madoff fraud, posing yet another hurdle for the hedge funds industry.

Ian Wace, chief executive officer and founding partner of London-based Marshall Wallace LLP, one of the largest equity global hedge funds, said hedge funds will be a preferred alternative investment as other options like equity markets, will continue to be very vulnerable.

“There is a feast of opportunity in hedge funds. Equity has become extremely unfashionable in the last nine months, corporate debt has become more fashionable,” said Wace, adding though that there is a lot of work that needs to be done before investors can overcome their fear.

“There was a traumatic over-reaction to things that are deeply serious. The reality is that most liquidity was sucked out of equities and trickled down on asset classes, but money will eventually come back.”

Government fiscal responses to restore liquidity were quick and just as aggressive but will likely take at least a year and a half before such stimulus will be felt, restore confidence and stability, said Joseph DiMena, head portfolio manager and co-founder of US-based Zweig-DiMena Associates.

“Governments are doing the right thing by buying time to prevent a systemic failure and this recovery will be reflected in equities and hedge funds.”

While governments are currently the sole and single-biggest source of capital for distressed companies, private capital eventually should come into the picture as stimulus packages won’t be sustainable in the long run.

· rocel@khaleejtimes.com