Tuesday, June 12, 2007

Hedge Fund Seminar Observations: A Soprano-like Ending

One of the major benefits that come with conducting events over a given period of time on an important topic such as hedge funds, it helps to provide a unique perspective. As a result, yesterday’s Hedge Fund seminar produced here in San Diego was remarkable on several levels. Most notable was the degree of sanguineness regarding certain risks that was at odds with the sentiments that were raised at the previous such seminars that I have conducted over the past four years. Perhaps it had to do with the specific work performed by the four panelists. Or, perhaps, it is a reflection of the comfort bull markets generate. Hard to say but certainly not hard to notice.

One of the risks that I am referring to is the risk management capabilities of hedge funds in general: the ability of hedge funds to manage the downside risks that are inherent in leveraged strategies. Blowups may be inevitable but none of my four panelists seem to be particularly concerned with a systemic contagion. This was surprising to me considering the fact that both the nominal and leveraged amount of money in the alternative investments world (hedge fund/private equity) has grown considerably over the past four years.

Another risk that I raised that did not seem to produce much in the way of a concern was the issue of correlations, within and across markets. A point made by one of my panelists was a belief that, while the markets may be highly correlated, the world’s economies are less so. This is the decoupling story, one that in my opinion has not been tested.

Investment Strategy Implications

As informative as yesterday’s event was (they always are), the standout item was the degree of sanguineness of my expert panelists. Fear and concern was fairly absent. As I stated above, perhaps this was a reflection of the unique markets or experiences that my panelists operate in. Or it is a sign of a broader investor sentiment. Hard to say, but definitely not hard to notice. In this case, I will take a page from the final episode of The Sopranos and let you decide what the outcome will be.

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