Over the hedge

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Over the hedge.

Hedge fund managers are an interesting breed. They've been lauded and lambasted over the decades and rightly so.

The good ones have made serious money and gained celebrity status. The bad ones have permanently lost clients money — and lots of it — often closing up shop as a result.

As a fund manager, I've had my share of flak over the years. Perhaps some was deserved, but at least some of the criticism was misdirected — supposed to be levelled at my investment brethren, the hedge fund industry.

The purpose of a hedge fund sounds a lot like a garden variety (get it?) managed fund — to maximise investor returns and eliminate risk. But there's a difference.

The name "hedge fund" came about because the aim of these vehicles is to make money regardless of whether the market climbs higher or declines.

Hedge fund managers can "hedge" by going long stocks (buying them) or shorting stocks (selling). Hedge funds often use derivative products and complex strategies to manage risk and turbocharge returns.

The other unique characteristics of hedge funds are the nature of their investors, their investment latitude, their fee structure and their ability to borrow — or leverage — to amplify returns.

Essentially they are investment vehicles that allow wealthy individuals to invest with a fund manager who can pretty much do what he/she wants, and charge handsomely for doing so. A "Two and Twenty" fee structure is common, with a two per cent annual management fee plus a 20 per cent share of any gains generated. This is significantly higher than "ordinary" fund managers.

I was interested to read a recent article entitled "Hell is Empty and All the Hedge Fund Managers are At the Bellagio". Even if you didn't find hedge funds interesting, you must be tempted with a headline like that.

The author, Hamilton Nolan, attended this year's SkyBridge Alternatives (SALT) Conference in Las Vegas, the annual get-together for the US$3 trillion hedge fund industry.

Hedge fund managers typically shy away from the spotlight but the SALT conference allows a rare glimpse into the thinking of many of the richest investors and financiers in America, as well as politicians, celebrities and international speakers.

Last year's was a pretty dismal affair as hedge funds had struggled to perform; this year the mood was reportedly more upbeat.

Nolan summarised this year's biggest bets, and convictions about business and economic trends, from what he called the world's most high-priced investment talent: "The end of the retail industry as we know it. The decline of shopping malls. Machine learning in every industry. Neural networks. A headlong rush into the robotisation of everything. Artificial intelligence. Self-driving cars. Commercial real estate is overpriced. Moderate macro-economic growth continuing for the foreseeable future. Selling portions of the broadcast spectrum. Short Tesla. And buy an exposure to the marijuana market in Canada, though recreational weed in America is still considered too risky."

So there you have it, the best ideas from the world's best hedge funds.

Some of these ideas may be career-defining for the assembled hedge fund managers. The problem — which is why I struggle with hedge funds - is they may be spectacularly good ideas or spectacularly bad.

And managers' careers and their clients' funds will follow suit.


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