The Hedge Fund Report: Another Way to Bet With Pros

The other scenario is the "passive" version. RBC Capital Markets announced last week that it has created a new investable index of hedge funds, comprising 250 managers. The bank plans on offering structured products linked to its new index. The investor gets exposure to a hedge fund index for the same reason a mutual fund investor would switch to an ETF. The idea is to buy the market instead of selectively picking the managers (or the stocks in the case of an ETF.)

Getting Crowded

You might think that the breakneck pace of mergers and acquisitions in 2006 would be manna for arbitrage funds that specialize in corporate takeovers. But the returns don't show it, and veterans in the space attribute the problem to overpopulation.

"There are a lot deals and it spreads out the number of people trying to get into each deal," says Russell Lundeberg, chief investment officer of Barrett Capital Management, a Midlothian, Va.-based multifamily office that is bullish on the strategy. For the first two months of the year, merger arbitrage posted a 4.40% return vs. 3.80% for all strategies combined, according to the HFRI Fund Weighted Composite Index.

"We're seeing a tsunami of money back into the field," says a former merger arbitrage hedge fund manager who reconverted into special situations. Says Tom Burnett, director of research at Wall Street Access: "Look at all those merger arbitrage start-up hedge funds. With the Internet, you can set up this thing in a closet."

Merger arbitragers are happy today with a 6% return, while in 2000, they wanted 8% to 10%, Burnett adds.

Tabled

Sometimes, hedge fund lobbying pays off, especially in Connecticut, which is effectively the industry's home state. A draft of a bill in the Connecticut Legislature would have required hedge funds that are based in the state to disclose their holdings. The proposal didn't play well with the Managed Funds Association, the largest hedge fund trade group. At a hearing of the state's joint banks committee, the MFA voiced its opposition. The original bill was killed and replaced by text that simply calls for the establishment of an antifraud unit. Nobody really objected to that.