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Time Is Right for Hedge Funds, Manager Says

Date: Friday, November 20, 2009
Author: Zachery Kouwe, The New York Times

Despite a tough run for hedge funds last year, at least one manager believes a number of factors have combined to create an attractive environment for hedge fund investing.

The Nexar Capital Group, a fund of hedge funds firm formed in September, says in a report to clients that new transparency initiatives, lower fees and other investor-friendly trends will combine to deliver superior risk-adjusted returns for investors in the asset class. (Read the full report after the jump.)

Eric Attias, Nexar’s chief investment officer and the author of the report, writes that he expects relatively low volatility in the market over the next few years, which typically leads to better performance from hedge funds.

The report, which was released earlier this week, notes that consolidation in the industry — 21 percent of hedge funds and funds of funds operating at the end of 2007 have been liquidated — has concentrated talented managers into fewer firms. As firms continue to liquidate, the industry should be well-positioned to redistribute and integrate its most talented professionals, Mr. Attias says in the report.

Bernard L. Madoff’s enormous Ponzi scheme along with the financial crisis has led many hedge funds to increase the amount of information they give to investors, the report says. Many hedge funds have hired independent risk assessors to oversee some of their funds’ activities and provide investors with detailed updates on positions. That should increase investor confidence in the industry and lead to further consolidation.

Along with increased transparency, hedge funds have reduced the amount of leverage they use and have better aligned their liquidity terms with the liquidity of their underlying investments, the report says. Firms are also lowering their fees in exchange for longer lock-up periods and the trend is expected to continue.

“Hedge fund performance, when compared to the risk-adjusted returns of other asset classes, is particularly attractive in the current environment — equities are getting more and more expensive and fixed income markets are expected to become more volatile,” Mr. Attias writes in his report.