Safe bet: Hedge funds likely to reap big gains in 2007
Hedge funds will make more money in stocks than in bonds in 2007, with bets on rising markets likely to be more profitable than those on declining prices, said Union Bancaire Privee, the world’s second-largest manager of funds that invest in hedge...
By Agencies |
LONDON: Hedge funds will make more money in stocks than in bonds in 2007, with bets on rising markets likely to be more profitable than those on declining prices, said Union Bancaire Privee, the world’s second-largest manager of funds that invest in hedge funds.
Returns will be “significantly equity-driven” while opportunities to profit from falling prices will be “less numerous” next year, said Jan-Erik Frogg, head of alternative investments at UBP, which manages more than $33 billion in hedge-fund assets.
Next year UBP will invest more capital with hedge funds that aim to profit from events like mergers and acquisitions and restructurings, Mr Frogg said. “We’re starting to see bigger margins in M&A, as well as higher volumes,” Mr Frogg said. The risk-reward ratio of investments in mergers and acquisitions “has become very good.”
So-called event-driven hedge funds in the Credit Suisse Tremont Index are up an average of 12% in the 10 months through October. These funds have attracted $7.3 billion in new capital in the third quarter, according to Hedge Fund Research.
UBP “will focus on strategies that are equity-driven, namely long-short equity, knowing that the short component isn’t very dominant,” Mr Frogg said. Event-driven hedge funds are “deep value” investors that “are better protected when the markets go south as you have an implicit hedge because the stock is undervalued and underinvested,” he said.
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The fund was ranked as the world’s No. 2 manager of hedge funds in an InvestHedge magazine survey in September. The company’s average hedge-fund portfolio has returned about 10% this year through October, Mr Frogg said. That compares with and average gain of 9.5% for the Credit Suisse Tremont Index. The Standard & Poor’s 500 Index, which is a common indicator of US stocks, has added 11% in the period, while Lehman Brothers Aggregate Bond Index has climbed 4.6%. This year UBP hasn’t invested with many new hedge funds and its list of approved funds recommended to clients “has evolved very, very marginally,” Mr Frogg said.
The company has benefited from well-established hedge funds re-opening to new investments from their biggest clients as they see more opportunities, he said. Hedge funds that take new capital are “not announcing to the whole world they’re re-opening, they like to take money from sources they trust and work well with,” Mr Frogg said.
Hedge funds, which control about $1.3 trillion in assets worldwide, have attracted $44.5 billion in the third quarter, the most since at least 2003, HFR said last month. Mr Frogg said hedge funds, which aim to make more money than mainstream mutual funds by taking bigger and riskier bets, are becoming more institutionalised and “have begun to build fully mature organisations with often hundreds of employees.”
While this is an “accepted trend,” UBP continues to believe that hedge funds, typically unregistered pools of capital that allow managers to participate significantly in the gain or loss of their investments, continue to attract “superior investment talent.”
“Whether they set up small or large organisations is irrelevant as long as they have the capability of generating returns commensurate with what we are looking for,” Mr Frogg said.
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