Hedge funds can play hero role in market restoration

Hedge funds can play an important role in helping markets to function properly again during times of financial turbulence, according to BH Macro.

Speaking at a recent roundtable on hedge funds and the credit crunch, Ian Plenderleith, chairman of Brevan Howard's BH Macro fund, said that hedge funds help markets to function properly again by taking their own positions on the pricing of assets.

Mr Plenderleith said: "Where there is a difficulty in pricing assets there is a terrific opportunity for hedge funds whose specialisation after all is to try to reach a view on the values and to back their own judgement with their own and their investors' capital if they think the market has got it wrong and they have got it right.

"By putting their money into markets and backing their judgement it helps to regenerate market liquidity and ultimately to get them functioning properly again. I do not think I would claim that hedge funds are doing that out of a sense of philanthropy or charity, they do it by pursuing profit opportunities for their own clientele but, in doing so, because they are active in markets they are helping them to function properly again and that is a valuable public policy contribution."

Also speaking at the roundtable, Anthony Simpson, managing director of Ramius, said: "There is a direct correlation between the severity of the damage that has been done in a financial crisis, the complexity of the price discovery of the underlying assets and how long it takes to rebuild the matrix of trading relationships. I think we can say with some certainty that the severity of the damage this time is almost beyond comprehension."

Mr Simpson added: "From the current crisis there are two main profit opportunities. First, the assets that have been most directly affected by the massive liquidations, including a variety of structured products - such as securities in the credit area, the mortgage area, the leveraged loan area."

"The second category is the areas that are going to benefit from the new market environment of increased volatility, higher disparity between asset classes and sectors, greater uncertainty and wider spreads. We have already begun to identify a number of investment opportunities in these areas and with careful homework and research we are confident that there are going to be very substantial opportunities."

However, Alistair Fitt, IFA for Monmouth-based Alchemy Wealth Management, said: "We have withheld from putting money in hedge funds for the time being due to the current uncertainty. The majority of our clients are not willing to take on that degree of risk at the moment."