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Hedge fund investor warns against stock bets

Date: Wednesday, April 29, 2009
Author: Svea Herbst-Bayliss, Reuters

Prominent hedge fund investor Mark Yusko on Monday warned endowments against putting the bulk of their money into stocks, arguing that these assets perform only when economies are growing.

For years most investors ranging from big institutions to average Americans saving for college and retirement have bet mostly on the U.S. stock market.

But in the wake of the worst financial crisis since the Great Depression, Yusko, who worked with two large college endowments before founding his own firm, Morgan Creek Capital, said investors need to change their thinking.

"The idea that equities should be your core asset is completely flawed," Yusko said, explaining that stocks tend to perform well only when economies are growing well.

Yusko was speaking at the 2009 Milken Institute Global Conference.

Morgan Creek manages roughly $9 billion (6.1 billion pounds) in Chapel Hill, North Carolina, and counted legendary hedge fund investor Julian Robertson as a founding investor in 2004. Robertson and Yusko agreed that Robertson would withdraw his investments this year.

"In the developed world, equities stink right now," he said, adding, however, "in the emerging world you can still make some money on them."

Many investors have recently taken solace in the market's rebound after heavy losses at the start of the year and after having lost roughly 40 percent in 2008.

But Yusko said it would be a mistake to jump back in now.

He warned that there will likely be more bankruptcies. Often when a company files for bankruptcy, investors lose the money they put in while bondholders may get a fraction of the bond's face value.

"We are going to see more bankruptcies than we had in the great depression and the idea that equities will survive is complete insanity," he said.

Bankruptcy filings have climbed as the credit crisis deepened. Analysts worry that a bankruptcy filing by two U.S. automakers trigger trouble for their suppliers and other related industries as well.

Similarly the banking system is still suffering problems with industry analysts expecting that some smaller players may face new trouble in the months ahead.

"For the next eight years, banks will not make money," said Yusko, who established his reputation as a top notch investor while overseeing the University of North Carolina at Chapel Hill's endowment. He also helped run the endowment at the University of Notre Dame.

"Bank equities are worthless," Yusko said.