Clients Get Creative as Funds Lose Appeal

By Laurence Fletcher

LONDON | Tue Jan 11, 2011 10:28am EST

LONDON (Reuters) - Hedge funds may finally be losing their sex appeal.

A small but growing number of investors believe these once-free spirited portfolios, viewed as the cutting edge of finance for most of the past decade, have become too conservative and boring.

Large and cautious pension fund and endowment clients are increasingly calling the shots in the industry, and investors such as funds of funds and rich individuals need to take matters into their own hands if they want higher returns.

"Some managers ... over the past two years have become too dull and the probability that they will become dead wood in the portfolio is too high," said Morten Spenner, chief executive of funds of hedge funds firm International Asset Management (IAM).

Managers made 10.2 percent last year, according to Hennessee Group, lagging behind the S&P's 12.8 percent gain and 17.5 percent at the average stock mutual fund.

Having already lost around 20 percent in 2008, many funds opted to cut back bets during last year's choppy markets when fears over Europe's sovereign debt crisis dominated, rather than risk giving up gains made during a rally in 2009.

Brevan Howard's $26 billion Master fund, for instance, rose just 1.5 percent in the 11 months to end-November after shying away from more risky bets.

Many rich people were attracted to hedge funds by stories of George Soros's $1 billion profit from his speculative attack on the Bank of England or John Paulson's $3.7 billion earnings in 2007 betting on the subprime meltdown.

But institutions -- who now account for over half of all hedge fund assets -- often prefer lower-risk funds, targeting single-digit or low double-digit gains.

"Steady, low double-digit returns are typically much better at attracting institutional investors than higher but more erratic performance," said Odi Lahav, vice president at Moody's alternative investment group.

Gross hedge fund leverage globally fell to 1.81 times in November from 1.93 times in August, according to Citi, also a sign the managers have become more wary.

LACK OF SPICE

With the eye-catching gains of 20-30 percent a year often seen in the 1990s now a distant memory, some investors are taking matters into their own hands.

Omar Kodmani, senior executive officer at Permal Investment Management Services, has asked managers to build him tailor-made portfolios riskier than the manager's main fund.

"In credit we asked for a portfolio that was only focused on one sector of the mortgage market -- we wanted a pure play. It is up 100 percent in a year and a half, and we have now reconfigured it to a broader mortgage special situations fund."

Reuters Contact Us Advertise With Us Help Journalism Handbook Archive Site Index Video Index Reader Feedback   Mobile Newsletters RSS Podcasts Widgets Your View Analyst Research Thomson Reuters Copyright Disclaimer Privacy Professional Products Professional Products Support Financial Products About Thomson Reuters Careers Online Products Acquisitions Monthly Buyouts Venture Capital Journal International Financing Review Project Finance International PEhub.com PE Week FindLaw Reuters on Facebook

Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.

NYSE and AMEX quotes delayed by at least 20 minutes. Nasdaq delayed by at least 15 minutes. For a complete list of exchanges and delays, please click here.

Read Full Article »