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March 30, 2006 9:11 pm

Hedge funds: what’s in a name?

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What’s in a name? In the case of some hedge funds, not enough. Those involved in private equity and other areas of finance make the hedge fund moniker a misnomer. So what should this new breed of money management companies be called? Our panel answers your questions:

Rod Barker of RAB Capital
Philippe Bonnefoy, Cedar Partners
Steve Schurr, Financial Times hedge fund correspondent
Paul Murphy, Development Editor of


Why don’t we call them Alternative Investments?
Steve, London

Philippe Bonnefoy: Alternative to what? Traditional Investments? Is a CDO a traditional investment? Is a gold ETF a traditional investment? These days a Portfolio Summary Statement should probably read: “Equities, Bonds, Cash, Other!” The term, Alternative Investments, covers hedge funds, private equity, venture capital, structured credit, leveraged certificates & warrants, commodities, forestry, art & collectibles, the list goes on... Hedge Funds should probably just be titled: ‘absolute return strategies,’ no benchmarks, no relative performance, just preservation of capital and positive returns in all market conditions - well, at least that is the objective.

Steve Schurr: Nearly 20 years ago in the book Market Wizards, hedge fund manager Michael Steinhardt said the term hedge funds is a misnomer because most funds don’t hedge, and a new name is almost 2 decades overdue. The more apt titles such as Alt In or absolute return funds haven’t seen any traction, so hedge funds seems here to stay. Besides, consider how misnamed mutual funds are. Vanguard is one of the only mutual fund names that remains a mutual ownership structure, so what’s in a name anyway.

Paul Murphy: The difficulty with the “alternative” tag is that it can be as misleading as the “hedge” tag. I wonder whether we may, in future, simply differentiate between “active” and “passive” investment funds.

For example, with the FSA suggesting that good ol’ British unit trusts might be free to go short of equities rather than simply following a long-only strategy, these funds will effectively become traditional hedge funds.

We could take this a step further and have “hyper” active investment funds at one end of the spectrum (busy churning their clients’ funds away) and “passive-to-the-point-of-being-dead” funds at the other end....


The FSA has been taking steps to allow for greater access for small investors. Is this a good thing? Should individuals invest in hedge funds?

Rod Barker: The FSA has spent a considerable amount of time and resource understanding the hedge fund industry. The fact that they have released the discussion paper supporting greater access to hedge funds for retail investors is a strong statement of support that the industry has achieved a comfortable level of maturity and transparency. Hedge funds generally are attempting to preserve capital as well as generate absolute returns and as such can actually be perceived as lower risk than traditional long only products. Of course, one can over generalize, and as in the traditional asset management industry one has to be selective. With this caveat, retail investors should be encouraged to look at hedge funds as a sensible investment vehicle.


Has the perception of hedge funds been overly-distorted by the frequent historical references in the media to George Soros and Black Wednesday?
Graeme, Cambridge

Rod Barker: The hedge fund industry has evolved significantly from the days of Black Wednesday but the perceptions on the part of the mainstream seemed to have lagged the reality of what the industry represents today. Today the hedge fund industry is closely regulated by the FSA and indeed the US SEC. With $1.5 trillion invested globally in hedge funds there has been an institutionalization of the industry in terms of transparency, disclosure and regulation. The days of clandestine offshore maneuvering which was the hallmark of the 1st generation macro funds are long gone.

Philippe Bonnefoy: Since Macro funds represent somewhere between 5-12% of the hedge fund universe it is somewhat disingenuous to tag all hedge funds with the idea that leveraged, directional trading characterizes a trillion dollar industry. Most hedge funds try to identify the mis-pricing of securities - whether in the equity, credit, debt or FX and commodity markets. By arbitraging out the structural or short-term mis-pricings they help all market participants operate in a more efficient market. Hedge Funds add tremendous liquidity to the market and that is an incredibly beneficial thing for all market participants.

Steve Schurr: Yes, the perception of hedge funds been distorted in this way, as well as by a few other seminal hedge fund events, such as the 1998 near-collapse of Long-Term Capital Management in the US.

George Soros’ bet to “break the pound” was, in my opinion, a great example of what good hedge funds often do best: see that the world has changed and position themselves to profit from it. Soros saw before the UK was prepared to admit it that there was a flaw in the ERM (European Exchange Rate Mechanism). He may have helped break the pound with his high profile bet, but what he really did was profit – enormously, reportedly more than $1bn – from what he saw as an inevitability.

But few hedge funds have had the ability or amount of success that Soros has had in changing the course of the markets. The more damaging event may be LTCM, which was an unmitigated disaster and nearly toppled the global financial system.

Either way, I believe there is a disconnect between what hedge funds are now and how they are portrayed in the media.


Was Werner Seifert being unfair when he described activist Deutsche Borse investors as locusts?

Philippe Bonnefoy: To be fair, I think Mr Seifert copied the term from Wolfgang Müntefering. Clearly in retrospect, Mr Seifert had a great idea. His problem is that he did not engage the core shareholders in what he was doing with their money.

Any CEO in the UK or USA has to be close to shareholders and his Board of Directors. The concept of management having to work hard to engage core shareholders in an active dialogue is very new in Europe and Asia. The Deutsche Bourse bid for LSE will most likely become a case study for the emergence of shareholder activism in Europe.

Paul Murphy: While Werner Seifert often gets credited for the “locusts” comment, I believe it was actually Franz Munterfering, chairman of the SPD in Germany, who referred to hedge funds as “swarms of locusts” descending on Germany.

Was it fair? Well, I think it was simply ignorant. Activist investors of all shapes and sizes have been quietly looking at opportunities in Germany for a good number of years now – the simple reason being that the Germany economy has been (and continues to be) in a state of flux. The inevitable process of structural change has thrown up opportunities and those opportunities will inevitably attract speculative cash.

Steve Schurr: The better term for HFs might be sharks. Sharks are highly misunderstood and the subjects of irrational fear, but also play a vital part in the ecosystem. When a company is in trouble hedge funds, like sharks, can smell blood a mile away and will definitely take advantage of the opportunity to profit.

The Deutsche Borse-TCI battle came amid a broader effort by hedge funds to reform “Germany Inc” – shake up its corporate culture and make it more shareholder friendly. Based on TCI’s victory and Werner Seifert’s defeat – as well as the robust returns in Germany over the past 18 months amid the activism – I would say this represents a win for the hedge funds. So you could say in Germany it is “Der Tag der Heuschrecke” – the day of the locust.


Should there be a clearly defined regulatory requirement for hedge funds to provide regular key performance indicators? If so, what should they be?
Mike, London

Philippe Bonnefoy: Why should a hedge fund have to report their performance to anyone other than their clients, prospective clients and their credit counterparties? If it is a question of risk, then the regulator can ask for data any time they choose. If regulators are worried about systemic risk they should be focusing attention on the risk positions of the prime brokers and investment banks that provide the counterparty financing to the hedge funds.

Paul Murphy: I, personally, would enjoy the stink if a regulator, such as the FSA, did lay down a list of mandatory indicators that had to be made public. Remember, many hedge funds go to spectacular lengths to keep their performance data private -- setting up elaborate schemes, for example, to stop outsiders using freedom of information requests to extract information through state pension schemes, etc.

I suspect that just the mention of such a disclosure regime would cause a run on the Mayfair property market.

That said, if alternative investment managers really do want to broaden their investor base to include retail clients, transparency does have to improve.


With hedge fund investment strategies increasingly seen as moving into the mainstream, where will investors looking for alternative investments go in the future?
Matt, London

Philippe Bonnefoy: Alternative Investing, by definition, is always expanding the horizons of normalcy. Financial engineering - mortgage arbitrage, swaps, structured credit trading, were all “exotic” not too long ago. Now they are fairly mainstream. What’s next? Carbon credit trading, power trading, weather derivatives, insurance derivatives, real estate index trading, water trading, oil and gas reserves trading.

Steve Schurr: A risk of hedge funds going mainstream is that the inefficiencies they seek to exploit for profit will begin to dry up. Some say the US markets, which are overcrowded with hedge fund assets, have been victims of this trend.

I think this notion of opportunities drying up because of the influx and massive growth of hedge funds is overstated. First of all, it presupposes that all hedge funds are removing inefficiencies from the market with their investments. Of the $1.5 trillion in hedge fund assets sloshing around, I’m sure there’s a good chunk of managers making loads of mistakes and adding to the “alpha” pool for the smart money to exploit.

That said, I think Asia and other emerging markets are the most fertile territories for alternative investments. There are inefficiencies between the region’s currencies to exploit, as well as domestic markets that are less well-covered.


Background and analysis:

Hedge funds: London wins prize for nurturing fast-rising star

Global hedge funds top $1,500bn

Capital gain: how London is thriving as it takes on the global competition

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