Last year saw several managers make stunning returns for their clients and become extremely wealthy in the process. Now high-fliers are forsaking fat salaries at the City's best known institutions to join the hedge fund operators.
Chief among the new British contingent are David Weill, of Vairocana, and Crispin Odey, of Odey Asset Management, both in their mid-30s. Last year, each earned well in excess of dollars 15m (pounds 10.1m). The precise amount is difficult to calculate, but Mr Weill is rumoured to have earned more than dollars 50m.
They have recently been joined by the likes of David Morrison and Jeremy Hale, two of Goldman Sachs's leading economists, who left to set up a London office for Tiger Fund Management, run by Julian Robertson, the well-known US hedge fund manager. In addition, Hugh Sloane, a top-performing investment manager at GT Management, has just established his own hedge fund management company, Sloane Robinson.
Returns like the 60 per cent (measured in deutschmarks) 1993 performance made by Mr Odey's fund and the 100 per cent (in dollars) said to have been made by Mr Weill are attracting more and more money to the business from rich individual investors. Mr Odey and Mr Weill are each said to have about dollars 1bn under management after starting the year with just dollars 100m. Institutional investors are said to be examining the phenomenon with increasing interest.
'I would think that as you go forward you will find pension fund managers indexing more and more of their portfolios and giving the rest to managers who are pursuing non-traditional-type strategies,' said Richard Atkinson, a director at IFM Asset Management, a London-based hedge fund manager. In turn, the managers are attracted by the possibility of high rewards. 'I think a lot of people have been able to adapt their conventional fund management skills to the hedge fund industry, which offers a far more attractive fee structure,' Mr Atkinson said.
Hedge fund managers typically charge annual fees of up to 2 per cent and up to 25 per cent of performance.
The defining feature of the hedge fund is its aim to achieve absolute performance, regardless of what the underlying markets might be doing.
Beyond this, many hedge funds have little in common. At one end of the risk/return spectrum are the market neutral funds, which have no exposure to the direction of the markets they are in. Instead, they seek to profit from arbitrage strategies exploiting differentials between, for example, bond markets' yield curves. At the other end, are the funds that take big bets on the directions of foreign exchange, stock, bond, or commodity markets.
In the last couple of years, when there have been big movements in these markets, it is generally the funds taking leveraged directional bets that have attracted most money.
Many hedge funds are based in offshore locations such as Bermuda and are largely unregulated. They have become so powerful that some of their highly leveraged trades are said to move even the vast foreign exchange markets.
Central banks are concerned that they have no way of identifying all the positions these funds are involved in around the world, and therefore no way of calculating how much risk they are taking.Reuse content