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Funds

They can’t all be masters
Apr 22nd 2007
From Economist.com

These days the bigger the hedge fund, the better

“THE New Masters of the Universe” was the cover splash chosen by Portfolio, a business magazine that launched last week, to highlight a feature about hedge funds by Tom Wolfe. The headline may have left some wondering if the editors or Mr Wolfe, author of “The Bonfire of the Vanities”, had fallen behind the curve. Egos in Greenwich and Mayfair have taken some hits in recent months. True, the best hedge-fund managers—or those with the best luck—continue to pull in ten-figure salaries. But the average fund returned much less than the S&P 500 (including dividends) last year. In the fourth quarter, moreover, hedge funds’ net inflows slumped as faith waned in their ability to outperform traditional assets and the world digested the collapse of Amaranth, a hedge fund that had bet disastrously on gas futures.
But perhaps Mr Wolfe and his editors had been given a sneak preview of the latest data from Hedge Fund Research (HFR), published a few days after Portfolio hit the news-stands. It showed an impressive rebound.
Hedge funds’ net inflows in the first quarter of this year reached a record $60.2 billion, four times the level of the previous three-month period (see chart). This brought the total amount held by such funds to $1.57 trillion. If money were to continue to pour in at its current pace, 2007 would see total net inflows of $240 billion, double the previous annual record.
Moreover, hedge funds are beating the indexes once again. They made an average return of 2.8% in the first quarter, compared with 2.1% for the MSCI global stock index and a paltry 0.6% for the S&P 500. The best-performing funds were those focused on emerging markets. Hedge funds are increasingly becoming activist investors in stockmarkets in developing countries, and reaping the benefits, according to a recent report from Citigroup.
More ominous for the markets in general,...