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Unloved hedge funds battle public anger

Date: Tuesday, April 14, 2009
Author: Abs-cbnnews.com

The secretive hedge fund industry is battling to dispel public "hysteria" over its role in the global financial crisis and faces an uphill struggle to mend its battered image.

Criticism of hedge funds has got louder in recent months stoked by controversy over the profits made from short-selling bank stocks and the largest investment fraud in Wall Street's history, committed by money manager Bernard Madoff.

Last year the industry delivered its worst performance, with the average portfolio losing 19 percent.

"There is hysteria about hedge funds, with hedge funds being the fountain of all bad things," Hugh Hendry, chief executive of Eclectica Asset Management, told the Reuters Hedge Funds and Private Equity Summit in London this week.

Because of the investment techniques hedge funds share with other firms, they have been unfairly associated with the financial industry's pariahs such as Madoff and troubled U.S. insurer AIG, said Andrew Baker, the head of the Alternative Investment Management Association (AIMA), a global hedge fund trade body.

"When the last hedge fund is closed ... those issues will still persist because they are not part of the hedge fund universe," he said, adding this is the message AIMA has been "pushing very hard ... in policy-making circles."

Hedge fund executives admitted they had to take part of the blame for their poor public perception.

"The industry has done itself no favors. The large majority of people haven't performed that well. One or two have performed really very, very poorly," said Mark Kary, chief executive of Polar Capital.

The funds' reluctance to talk to the media didn't help their image either, speakers at the summit said.

"Hedge funds are by and large rich and British and therefore kind of confused about being rich and kind of apologetic about being rich and they don't talk," Eclectica's Hendry said.

Another problem is a lack of understanding about short-selling as "part and parcel of any capital market," said CQS Chief Executive Michael Hintze.

Vital players

The $1.4 trillion sector did not cause the credit crunch, the International Organization of Securities Commissions said earlier this month, adding that hedge funds helped market liquidity, price efficiency and global market integration.

AIMA's Baker said hedge funds manage people's savings and provide capital in economic downturns and so are a vital economic player, especially now that institutions such as pension funds and university endowments account for more than half of the industry's assets, surpassing wealthy individuals.

For example, high-profile Toscafund earlier this month launched a fund to buy and repackage mortgages, which have fallen sharply in value since the start of the subprime mortgage crisis in 2007.

Private equity is also suffering public ire even though it can ease the recession by investing in and turning around struggling companies, industry insiders said.

"There is clearly no political goodwill toward financial services in general and everyone within financial services is being lumped into the same bucket," said Andrew Newington, managing partner at BC Partners.

But Barker sees a glimmer of hope. "There is hope of rehabilitation and redemption somewhere down the track," he said.

"I'm still not telling taxi drivers that I work in the hedge fund industry. Give it a couple more days and I might.