May 03, 2006
Hedge funds try to limit risks
Yesterday, I wrote a short piece about how hedge fund managers seem to be reluctant to make risky investments. Doesn’t this sound a bit odd? I mean hedge funds are supposed to make money the risky way so how do these managers hope to make big money without taking adequate risks. Their argument is that their customers don’t want them to deal in such investments. So, for fear of losing these customers and more importantly, their fees, which can only be called exorbitant, hedge fund firms are now learning to play safe.
This sudden change in what is essentially a risk-taking business came about slowly. As fund managers realized that they were making a killing by raising money from pension funds, endowments, insurance companies and other institutional investors, their taste for the dangerous diminished. And the clincher was the 2 percent per annum management fees from large amounts of assets. With all these benefits, it didn’t take long for caution to become the new byword for hedge fund managers.
The sector's profile witnessed a change after institutions poured money in and drove worldwide hedge fund assets to more than $1,000bn. This large amount of money has weighed heavily on hedge fund performance and has led to ‘overcrowding’ in many strategies. Then there were institutional investors like pension funds which have asked the hedge funds in which they invest, to reduce their risk levels.
However, any which way you look at it, hedge fund firms seem to be the gainers. As they reach critical mass, these firms begin to slowdown their aggressive activity and try to appease their major clients. This strategy of caution allows other investors to repose more faith into these firms, which then translates to more business and more money.
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