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Hedge fund managers in portfolio are net short

Date: Thursday, March 5, 2009
Author: Laurence Fletcher, Reuters.com

* Says economies in "disastrous cycle", things to get worse
* Hedge fund managers in portfolio are net short
* Says credit a "terrible thing to buy"
By Laurence Fletcher
LONDON, March 4 (Reuters) - F&C Partners portfolio manager Francois Barthelemy is invested in hedge funds that are betting on falling equity prices because he believes economies are in a "disastrous cycle" and conditions will get worse.
Barthelemy, who runs funds of hedge fund portfolios, told Reuters the long/short equity funds he holds were net short because the managers believe conditions will be "bad for a long, long time".
He picked out strategies such as distressed and managed futures as likely winners, but said high-yield bonds and credit were to be studiously avoided.
Having a net short position means bets on falling security prices exceed bets on rising prices.
"There was a debate last year about whether there was value in the market. That's gone and there's no more debate. Everyone agrees this is a disastrous cycle that we're in and is going to get worse," Barthelemy said in an interview late on Tuesday.
"Our managers are quite short and are making money."
Long/short equity strategies lost 19.76 percent last year, according to Credit Suisse/Tremont, hamstrung by many funds' large net long positions even as stock markets were falling. In contrast, shorting was one of the few hedge fund strategies to make money in the worst year on record for hedge funds.
Dedicated short bias funds rose 14.87 percent, compared with an average industry loss of 19.07 percent.
Barthelemy said that although corporate credit and convertible bonds look cheap at the moment, the need to refinance will present a significant headache for companies.
"You can make money through distressed (investing), but high yield is a terrible thing to buy and credit is a terrible thing to buy," he said.
"Credit is a massive play on the refinancing of companies ... It's going to be very difficult to refinance and there will be a lot of bankruptcies."
Investors buying securities in distressed companies need to do their homework on corporate cashflows, he added.
"The only thing you should buy (in distressed) is where cashflows have been modelled properly and you know there won't be requirements for additional costs. Buying companies that will need money at the end of 2009 is a silly trade." (To read the Reuters Hedge Fund Blog click on http://blogs.reuters.com/hedgehub; for the Global Investing Blog click on http://blogs.reuters.com/globalinvesting/) (Editing by Andrew Macdonald)