The Hedge Fund Report: Locking up the Money

Real Returns

Equity hedge funds make money by stock-picking, not short-selling, according to Barclays Capital's latest Equity Gilt Study. That would explain why some successful managers like Caxton Associates or Maverick Capital have rolled out long-only funds in the recent past. The study shows a strong correlation between long/short hedge fund indices and the Nasdaq Composite, suggesting that returns are not so much the fruit of a manager's skill but rather simply of market conditions. The study also points to return differentials between large-caps and small-caps. It suggests that a hedge fund investment can be replicated by a long Nasdaq position combined with a short big-cap/long small-cap position.

In a recent conference, Aleksander Weiler, investment strategist at Tremont, underlined some of the newest and most exotic niches where hedge funds can make money. The list is interesting and bizarre: catastrophe reinsurance that has conventionally been the province of offshore reinsurers; activist investing, a space traditionally undertaken by private equity firms; credit default swaps; derivative instruments tied to the housing markets; and trading carbon-emission rights. Strangely enough, asset lending and PIPEs were not part of the list. Have those styles acquired mainstream status?