Offshore Hedge Funds The dismal condition of equity markets has caused many investors to look at hedge funds to better their returns. But, says Victoria Hartley, buyer beware Hedge funds are one of the most complex, misunderstood investment vehicles around. Some take huge risks gambling vast amounts of money trying to influence the direction of markets. Others rise by stealth, growing by taking advantage of tiny - but important - pricing anomalies between international markets. Any investor would have the right to feel slightly nauseous about the prospect of dabbling in this high-risk, low-regulation market. Bad memories, like the near collapse of US hedge fund Long-Term Capital Management in 1998, which led to a US$5 billion bail out from the Federal Reserve, did little to reassure potential investors. But in today’s economic climate, with falling interest rates and poor equity market performances, the search for returns has put hedge funds back in vogue. Credit Lyonnais is one of the many new providers to demonstrate belief in the market with the launch of a series of hedge funds through Systeia Capital management, and an investment of over US$230 million of its own assets. Offshore Hedge Funds - Complex And Intimidating Hedge funds invariably seem complex and intimidating to the uninitiated investor, partly because they’re run in such secretive ways. But specialists claim that, when used properly, they can be a great option in the current uncertain market conditions. We’d better explain. Like futures, hedge funds have a Jekyll-and-Hyde personality which means that they can be used either for optimum safety or for out-and-out risk, depending on the manager’s strategy. It was the risky approach to hedging that flattened LCTM in 1998; but it’s the safety approach which is attracting interest from the world’s pension funds at the moment.
All hedge funds make their money by exploiting pricing anomalies, looking for inefficiencies between different markets and piling in with large cash investments in order to make small short-term profits. The safety approach doesn’t aim to beat the markets, but to match them: but the risk approach, which is popular among American investors, is to second-guess the market - and, if possible, to influence it with the sheer weight of money involved. Offshore Hedge Funds - Hedge Fund Managers Hedge fund managers don’t like divulging their secrets, and most insist that they need to remain unregulated in order to stay ahead of the competition. They favour tax hideaways like Bermuda or Switzerland where scrutiny is lighter. But this secrecy isn’t deterring mainstream investment houses from committing themselves increasingly both to single manager hedge funds and funds of funds. “By the mid-90s”, says hedge fund specialist Simon Rostrond of Rostrond & Parry, “banks were providing access to funds of hedge funds and the more traditional investment styles were starting to develop.” In 1998 there were an estimated 3,300 funds with estimated assets under management of approximately US$375 billion; but this year the market will grow to US$500 billion, according to Hedgeworld.com, the hedge fund portal. Until now, other options like high yield bonds or technology stocks have been competing with hedges for high-risk/high-return investment. But last year’s 20 per cent falls on the FTSE and the Dow Jones have reawakened market enthusiasm for hedge funds. Offshore Hedge Funds & Richard Wortes Richard Wortes, managing director at Global Asset Management UK, says: “Hedge funds demand tighter risk controls. We have teams monitoring performance. Hedge fund managers would be fired if they performed at market levels.” But analysts warn that many of the managers moving into the area as it expands will be inexperienced. Rostrond adds: “The real money is made by individual managers, not funds-of-funds boys. The best funds may be full already, and people may be disappointed that high-risk doesn’t always bring absolute returns.” 
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