The New Year has begun. Hangovers and indigestion are fading and we have another avalanche of fund l...
The New Year has begun. Hangovers and indigestion are fading and we have another avalanche of fund launches, glitzy marketing brochures and interminable road shows to look forward to.
Investors will once again suffer a whole series of investment crazes and will demand access to whatever the 'new thing' is at the time. And, as usual, your job will be to stop them from getting it.
But, hidden in the maze of commercial self-interest, there will be a handful of genuinely interesting, thoughtfully constructed products that could usefully occupy a niche in your clients' portfolios.
As can be seen by the front page of this magazine, the hedge fund fashion is still very much in season. The bubble has yet to burst and is swelling impressively.
But there is a difference between this and previous investment fads. Firstly, hedge funds have been popular among the knowledgeable few since the 1950s. They might be more accurately described the 'old new thing'.
Secondly, there is no such thing as 'a hedge fund'. The term describes at least a dozen distinct strategies with differing risk/return profiles, market correlations and required skill sets.
They aren't tapping into a specific market and, by their hedging nature, their performance cannot spiral as more money comes into the field. In fact, the problem is very much the opposite. As more capital swamps the terrain, it gets increasingly difficult to find those unusual, unknown deals that allow managers to make money when the rest of the market is dying. In a sense, it is a self-rectifying process: when too much money goes into merger/arbitrage, for example, margins on M&A deals go down, not up. And if a fund is badly run and loses money, people redeem.
However, there is still cause for caution ' not from a market bubble, but from fund of hedge fund managers that promise to guide the ignorant through the maze. The question is: where does the money they attract go?
The fact is that there are very few hedge fund managers who are bright enough, experienced enough, or imaginative enough to succeed using these difficult and demanding strategies. As I've just said, as more assets are allocated to alternative strategies, it not only becomes increasingly difficult to make money, but also the quality of managers prepared to take on more money goes down. Money starts being allocated to third rate, or at least unproven managers, who promise the world and then are under pressure to take on more risk to deliver.
And when they make mistakes, as they inevitably will, their funds could do very badly indeed.
So, although there is no market-driven bubble leading to a crash in this particular craze, the effects on your clients' portfolios could be much the same.
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