Investors aren't the only ones finding it hard to make ends meet in a world of low returns. Hedge fund managers are in the same boat. Many of the anomalies they relied on to make returns investing in conventional markets have been arbitraged away. The recent performance of managed futures hedge funds, which trade on market momentum, is indicative. Returns fell 7% in the year to February, according to CSFB/Tremont. Convertible arbitrage funds were down 0.8%; short-bias funds returned just 4%.
Hedge fund managers would like to invest in more esoteric and volatile asset classes, such as emerging markets and distressed debt. These markets are less efficient and so offer more scope for outperformance. Hedge fund returns in these areas have been as high as 14% in the year to February.
But there's a snag. Hedge funds are nowadays increasingly reliant on institutional investors, not just risk-taking wealthy individuals. And these risk-averse investors cannot easily follow funds into riskier markets.
How can hedge funds attract institutional investors while also embracing more ambitious trading strategies? The rocket scientists think they have found a way. They have devised a technique enabling investors to put money into rarefied hedge fund strategies without bearing the additional risk.