The growth of the alternative funds business has been nothing short of spectacular. Managed futures has roughly $130 billion in assets under management, according to Barclay Trading Group. But according to Hedge Fund Reports, today there is an estimated $1.1 trillion in assets in hedge funds and that number most likely is dated. For example, the former Harvard Management manager just launched a hedge fund and raised $6 billion in record time. That kind of money-raising ability is phenomenal, but it seems like it could become standard in the hedge fund world.
In early February I moderated a panel discussing the evolution of hedge funds at the Managed Funds Association Network conference in Miami. My panelists were four heads of some of the largest trading advisors in the business, who collectively, I estimated, have about 22% of the assets under management in the managed futures arena. Some have ventured into the hedge fund side while others have decided to “stick to the knitting” that has made them successful, as John W. Henry & Co.’s President Mark Rzepczynski described his firm’s model.
But what actually defines a hedge fund? Largely these funds use leverage, have long/short ability, cover broader markets than mutual funds — thus can go into bonds, forex arbitrage, futures — and have a structure that gives the manager the freedom to trade different sectors. In many ways, this definition also describes futures funds, which cover equity, bonds, forex and commodities while providing long/short abilities and allowing managers flexibility in styles. But managed futures aren’t necessarily counted in the hedge fund definition.
In the course of the conversation, my panelists agreed that managed futures really should be included as one of the hedge fund styles. “We’re a tool used for investing,” said Mark Rosenberg, chairman of SSARIS Advisors. “You wouldn’t call a carpenter a hammer; it’s a tool he uses. Futures are a tool an investment manager uses.”
So could the explosive growth of these funds be due to the nebulous definition? Perhaps, but more likely hedge funds’ broadness meet the needs of today’s new investor. For example, if fund-of-funds account for about 40% of the investment in hedge fund assets under management and high net worth individuals 23%, the rest of the investment make-up is split between institutions, family offices, private banks and foundations and endowments. So it seems the large investor, ie. institutions, have come into the hedge fund arena as a force. Bruce Cleland, president of Campbell & Co., commented it was much easier to discuss futures with institutions these days, although there still seems to be a hurdle in recognition: When identifying yourself as a managed futures fund the door may open much slower than if you introduce yourself as a hedge fund. In the end, hedge fund growth isn’t so odd when considering today’s new CEO typically is an MBA who isn’t afraid of fewer vanilla investment possibilities, the panel noted.
John Kelly, president of Man Investments, NA, noted the rest of the world seems further ahead of investing in these products than in the United States...although that could change rapidly. Now that U.S. managers are becoming more acquainted with these products, the growth could be even more impressive.
Bottom line is hedge funds are not the enemy, but simply a larger genus of managed futures, and eventually the panel predicted “hedge fund manager” would describe all fund managers. In fact, this month we spotlight some of the best commodity trading advisors (CTA) of 2005 (see “Top traders of 2005,” by Managing Editor Daniel P. Collins, page56), some already on the way to that “hedge fund manager” status.
