Hedge funds no longer maverick: Russell

Hedge funds are losing their maverick image and becoming far more institutionalised and seemingly conservative, a visiting expert says.

Thursday, October 26th 2006, 5:54AM

Russell Investments director alternative assets David Tsujimoto, who is in New Zealand at present, says the hedge fund managers should no longer be seen as risk taking people, taking big bets on where markets are moving.

He says new management styles are developing which tend to paint hedge funds in a new light.

This includes things like activism where a manager takes a stake in a public company and tries to influence change at various levels including board representation. Another is where they provide finance to small and medium sized companies - a space that banks in the US have ignored as they become bigger.

Part of this change is been driven by institutions and pension funds investing in hedge funds.

Tsujimoto notes that hedge fund returns appear to be coming down, however when one analyses where the return comes from hedge funds managers are adding value.

He says returns are made up of alpha (value add through skills and talent) and beta (returns from the market).

He says poor market conditions have led to a lower beta contribution to returns. However managers have actually been adding alpha.

Another view, which may surprise people, is Tsujimoto's view of where hedge funds fit into a portfolio. The question for investors and advisers is: Do you put hedge funds into a portfolio in place of shares and growth assets, or bonds and income assets?

His view is that hedge funds can replace income assets as they are not closely correlated to equity market performance, they have "stable returns" and hold up well when there is a declining sharemarket.

Other changes happening in the hedge funds world include the development of more funds outside of the United States.

Tsujimoto says in the past most of the funds were based in the US. However now there are many funds in the United Kingdom, Europe and the Asia Pacific region. Added to that are a growing number of funds in South Africa and Latin America.

Russell is always looking for new and promising funds and has even looked at managers in New Zealand.

Tsujimoto says there are some new funds in New Zealand, but he has yet to find any which are promising.

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