Hedge Funds Disappoint Investors

Hedge fund managers can make an investor rich quicker than anyone else. Sometimes they can make him poor even faster. Amaranth Advisors, the Greenwich are some examples. They stumbled over wrong-way bets on natural gas. In September 2006, Amaranth was up 26%. And by October, it was facing a loss of $6.6 billion. Probably, the next Amaranth is waiting somewhere to happen.

Since 2000, the hedge funds world has more than doubled in size. Today, there are more than 9000 of these funds with combined assets of $1.34 trillion. Everyone is chasing these funds, which have become private pools of capital and allow managers to participate substantially in the investment returns they generate for clients.

A huge investment of $110.7 billion was recorded into these vehicles during the first nine months of 2006, more than twice in all of 2005. Since September, Morgan Stanley has purchased a hedge-fund firm and bought stakes in two. According to HFR and Bloomberg, Goldman Sachs Group has become the largest manager of hedge fund money since late 2005, with $29.5 billion in assets and certificate of deposit rates.
So many hedge funds have emerged in the markets that it is becoming difficult to generate standout profits. On September 30, the average hedge fund was up 7.1% in 2006. Investors would have got higher returns buying a mutual fund that tracks the Standard & Poor’s 500 Index, which returned 8.5% through September. While hedge funds typically take a 20% cut of profits and charge a fee of 2% of assets, the Vanguard Institutional Index Fund charges expenses as low as 0.025% of assets.

Theodore Aronson, a principal of Philadelphia-based Aronson & Johnson & Ortiz, thinks there is a potential danger ahead. “You don’t have to go back to the tulip bulb mania to see how things could turn out,” he said. “It could be ugly.” Returns have started slackening and analyst think hedge funds may have a hard time hitting the investment goals of an investor.