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IAM urges clarity in hedge fund industry

Date: Monday, December 8, 2008
Author: Daniel McAllister FTAdvisor.com

Hedge funds will need to be more transparent in 2009 after a rocky year for the industry, warned fund of hedge funds manager International Asset Management.

The fund of hedge funds industry has been hit, along with much of the financial services sector, by bank failures, deleveraging and recession over the last year, according to Morten Spenner, chief executive at IAM.

Illiquid securities in a falling market - coupled with an “unwarranted sense of optimism” by managers about the safety of their business - have proven a challenge for funds of hedge funds, Mr Spenner said.

“The degree to which people have misunderstood the industry has been an additional challenge for hedge funds to overcome," he said. "Reactions have been emotional rather than analytical."

He said the hedge fund industry served as the "perfect scapegoat" as it has no unified voice, despite the efforts of industry bodies like Aima.

“The value of a true partnership between manager and investor, as well as transparency, will be of utmost importance for the hedge fund industry in 2009.”

He added that there should be personalised investment portfolios that give investors more decision-making powers.

Mr Spenner also criticised the hedge fund industry for its conduct over the year.

“Greater transparency is needed in the hedge fund industry," he said. "There has been a lot of greed and naivety over the past year, with the industry growing in a manner not dissimilar to that of the subprime mortgage market.

Mr Spenner aimed to quash criticism of the industry for shorting stocks during the collapse of the global banking sector this autumn. He also expressed the need for governments to lift the shorting ban imposed earlier this year.

"The shorting ban has always been a short-term measure in exceptional circumstances, and we have confidence the US and UK regulators will recognise this fact," Mr Spenner said.

Commodity trading advisers (CTAs) have been the most favourable strategy for IAM over the past 12 months, according to Sean Molony, product specialist at IAM.

“We turned positive on CTAs at the beginning of 2008, increasing exposure, which led to positive attribution, and we continue to have a high level of conviction at an analytical level for managers that have been approved,” he said.

The global assets under management of CTAs was $234bn (£156bn) as of the second quarter of 2008.

CTAs' popularity comes down to the high returns, but low correlation to other hedge fund strategies and equity markets, Mr Molony said.

CTA managers also use futures, which have the benefits of being highly regulated and liquid and having low transaction costs and minimal counterparty risk, Mr Molony added.

Further, CTAs perform well in periods of market dislocation and do not have the same capacity constraints faced by other funds, he said.