Shrinking returns from hedge fund equity strategies are forcing the industry to foray into traditional fund management and bring these two poles of the investment spectrum a step closer, analysts say. Some analysts expect the gap between the two fund management styles to disappear over the next decade.
Unlike conventional fund managers, hedge funds can make money by short selling on the expectation of being able to buy a stock back cheaper at a later date. In doing so, they preserve investors' capital during bear markets. Since they also buy, they gain when markets are rising as do traditional "long-only" funds.
But the range-bound equity markets for much of this year have provided a poor hunting ground for hedge funds, so they too are moving to offering long-only products - though with more lucrative fees.
Like most other hedge funds they are still offering absolute - positive - returns, rather than returns based on benchmark market indices used by traditional funds.
This allows them to charge more than the annual 30-50 basis points traditional fund managers charge, but less than normal hedge fund fees management fees of around 2 percent.
Some have decided not to add on performance fees, while others have made provisions to charge up to 20 percent depending on how well the manager has done. "They are doing it very simply because they want a revenue stream which creates a higher valuation for their corporation," Jim Hedges, president of US-based LJH Global Investments told Reuters.
Hedge funds that have launched or are planning to launch long-only products include US-based Caxton Associates, which is estimated to manage around $4 billion, and D E Shaw, which has assets around $9 billion. In Europe, Egerton Capital, which manages around $3 billion, is also an early player in the sector.
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