Clients get creative as hedge funds lose sex appeal

By Laurence Fletcher
LONDON | Tue Jan 11, 2011 3:17am EST
LONDON (Reuters) - Hedge funds may finally be losing their sex

A small but growing number of investors believe these once-free
spirited portfolios, viewed as the cutting edge of finance for most
of the past decade, have become too conservative and boring.
Large and cautious pension fund and endowment clients are
increasingly calling the shots in the industry, and investors such as
funds of funds and rich individuals need to take matters into their
own hands if they want higher returns.

"Some managers ... over the past two years have become too dull and
the probability that they will become dead wood in the portfolio is
too high," said Morten Spenner, chief executive of funds of hedge
funds firm International Asset Management IAM.L.

Managers made 10.2 percent last year, according to Hennessee Group,
lagging behind the S&P's .SPX 12.8 percent gain and 17.5 percent at
the average stock mutual fund.

Having already lost around 20 percent in 2008, many funds opted to
cut back bets during last year's choppy markets when fears over
Europe's sovereign debt crisis dominated, rather than risk giving up
gains made during a rally in 2009.

Brevan Howard's $26 billion (16.7 billion pounds) Master fund, for
instance, rose just 1.5 percent in the 11 months to end-November
after shying away from more risky bets.

Many rich people were attracted to hedge funds by stories of George
Soros's $1 billion profit from his speculative attack on the Bank of
England or John Paulson's $3.7 billion earnings in 2007 betting on
the subprime meltdown.

But institutions -- who now account for over half of all hedge fund
assets -- often prefer lower-risk funds, targeting single-digit or
low double-digit gains.

"Steady, low double-digit returns are typically much better at
attracting institutional investors than higher but more erratic
performance," said Odi Lahav, vice president at Moody's alternative
investment group.

Gross hedge fund leverage globally fell to 1.81 times in November
from 1.93 times in August, according to Citi, also a sign the
managers have become more wary.

With the eye-catching gains of 20-30 percent a year often seen in the
1990s now a distant memory, some investors are taking matters into
their own hands.

Omar Kodmani, senior executive officer at Permal Investment
Management Services, has asked managers to build him tailor-made
portfolios riskier than the manager's main fund.

"In credit we asked for a portfolio that was only focused on one
sector of the mortgage market -- we wanted a pure play. It is up 100
percent in a year and a half, and we have now reconfigured it to a
broader mortgage special situations fund."
Source: Reuters.Com