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Wednesday, Jun 21, 2006

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The roughest berry on the rudest hedge

D. Murali

Sensex is down about 200 points. Perhaps, "dancing to a different tune than in other developing countries," as the chief of Naissance Capital, a Swiss hedge-fund company, is quoted in a Bloomberg story dated June 15. Zurich-based Naissance's Jaipur Fund is targeting as much as $200 million of investments by the end of the year, informs the report.

`Hedge funds go hunting for India mid-cap stocks,' reads the headline of a June 18 Reuters alert on "Hedge fund managers are going shopping for Indian stocks, especially those of medium sized firms in the consumer, technology and infrastructure sectors with potential to become blue-chips," begins the London-datelined story. It cites John Morris, president of US-based Fulcrum Investment Group as saying, "There are some very attractive opportunities... The market right now is in a healthy disposition."

To those running for cover behind hedges seeing the biggies in the race, it should help know what `hedge funds', a.k.a. `hedged funds', are. Funds that invest in liquid instruments such as currency and interest rate derivatives, with the aim of making profits from movements in foreign exchange or bond markets, says Oxford Dictionary of Business.

Origin of `hedge funds' is traced by Investopedia to Alfred Jones, who in mid-twentieth century, tried to minimise the risk in holding long-term stock positions by short selling other stocks. "When a 1966 article in Fortune magazine highlighted an obscure investment that outperformed every mutual fund on the market by double-digit figures over the past year and by high double-digits over the last five years, the hedge fund industry was born," educates

Hedge means `a fence or boundary formed by closely growing bushes or shrubs,' as Concise Oxford English Dictionary defines. Fences are for protection; so too, hedging is an operation undertaken by a trader or dealer to protect an open position, just as Jones did, by offsetting the risk in longs with shorts. "The combination of longs and short provides a natural hedge to market-wide shocks," notes It alerts, however, that much more common are funds that are not hedged, thus making the word `hedge' in hedge funds misleading.

For hedge-fund-baiters it should sound as music to read this snatch from "Prefixed to any word, hedge `notes something mean, vile, of the lowest class' [Johnson], from contemptuous attributive sense of `plying one's trade under a hedge' (hedge-priest, hedge-lawyer, hedge-wench, etc.), a usage attested from circa 1530." An apt line is from Love's Labour's Lost, "The pedant, the braggart, the hedge-priest, the fool... " Also, Ocatavius Caesar's talk about `the roughest berry on the rudest hedge,' in Antony and Cleopatra.

Hedge funds managers make money through fees. "Along with a 1 per cent to 2 per cent management fee levied on assets, hedge funds typically keep 20 per cent of the profits generated each year as payment," informs Amey Stone in an August 2005 article on "A `high water mark' may be specified, under which the manager does not receive incentive fees unless the value of the fund exceeds the highest value it has achieved," states

Lot of performance is happening, you'd notice from a May 26 report on headlined, "Top hedge fund manager had take-home pay of $1.5 billion in 2005 on 5 per cent fee and 44 per cent of gains." It cites Alpha, a magazine published by Institutional Investor for the tally of billionaires that `the golden age of hedge funds' has produced. But a June 19 report on is on Barclays Global Investors' research finding that hedge fund managers do not always deserve their high fees.

Are hedge funds regulated? They are lightly regulated private investment funds, sometimes characterised by unconventional strategies, explains Wikipedia. "They are primarily organised as limited partnerships." As a result, market regulators have only guesstimates on hedge fund operations. Which is why cautions `Hedge funds, those hyenas,' in a June 16 story by Barry Sergeant. He opens with European Central Bank (ECB) warning that hedge funds have created a `major risk' to global financial stability.

Data closer home are sparse on hedge funds. For insight into what the industry thinks about controls, read a June 19 posting on that talks about how nearly a third of the respondents to `Hedge Fund Transparency Survey' said they were against further regulation and standardisation. Are hedge funds good places to grow your money in? May be, yes, if you can do with `the roughest berry on the rudest hedge.'

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