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Friday, 12th April 2024
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Hedge funds come into the open Back  
Despite their insignificance in terms of assets under management (approximately $1 trillion), compared with the long-only funds industry (approximately $83 trillion), hedge funds have become the topic ‘de jour’. Open any paper or financial magazine, and you will find pages dedicated to developments in the industry, (including this issue – see pages 2 and 10) with a particular focus on the sector’s recent woes. It seems it will only be a matter of time before Eileen Dunne is discussing the relative merits of convertible arbitrage strategies as opposed to the global macro approach on Six-One.
So why the level of interest?
Up until recently, hedge funds were seen as a world of secretive companies developing highly complex financial instruments aimed at high net worth individuals, and therefore not of interest to the financial services world at large. But with the increasing institutionalisation, and burgeoning retailisation of the market, the level of media coverage afforded to hedge funds has also grown proportionally as more and more people get involved in the sector.

Another factor is the glamour aspect of hedge funds, which is largely derived from the financial gains made by both investors, and managers, that no S&P 500 index tracking fund can match. The latest edition of specialist hedge fund magazine, Alpha, lists the top earners in the industry. The average hedge fund manager on the list of the top 25 earners made $251 million in 2004, up from nearly $136 million three years earlier. Last year, the world’s top-paid hedge fund manager was Edward S. Lampert of ESL Investments, who earned a cool $1 billion. In second place was James H. Simons of Renaissance Technologies, who made $670 million after posting a 24.9 percent return.

Unlike traditional fund managers who make their money from taking a fixed percentage of assets under management, hedge fund managers generally make ‘1 and 20’ - 1 percent of assets under management and 20 percent of profits. However, even this generous cut differs from manager to manager. According to the Alpha survey, Steven A. Cohen of SAC Capital Advisors, earned $450 million in 2004, after taking a 5 per cent management fee and 44 per cent cut of the profits.

However, with average returns for 2005 considerably down on last year, and an increasing number of managers chasing the same returns, this level of may compensation may not be maintained.

In addition, there are increasing concerns about the impact highly-leveraged hedge funds may have on global financial stability, and in the article opposite, some of the world’s leading regulators including Alan Greenspan and Charlie McCreevy, give their views on this, with McCreevy favouring increased regulation of the industry.
So with all this uncertainty in the industry, it seems that now that hedge funds have come into the open, they will continue to command a high profile in the near future.

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