Thursday, February 01, 2001

Performance is Driver Behind Alt Allocations

Performance is Driver Behind Alt Allocations
Alternative Investment News
By Pamela Appea
February 2001

The numbers are in--hedge funds are out front, driving institutions to allocate into the arena. With alternative investments beating the traditional stock and bond markets, institutional investors are expected to continue their move into hedge funds in 2001.

Buoyed by the sector’s strong performance, in general, many investment officers at pension plans, foundations and endowments are looking at entering or increasing their investments in these alternatives, consultants said. Hedge fund managers also report an uptick in interest from institutional investors.

“Last year, told the story and that convinced people who were sitting on the fence,” said Terry Jones, managing director at New York-based Arden Asset Management, a market-neutral fund of funds. “They really had to see it to believe it.”

Indeed, 2000 was a banner year for hedge funds which, according to the Hennessee Hedge Fund Review, returned 6.25% for the year, outperforming the Nasdaq Stock Market (-39.72%), the Standard & Poor’s 500 Index (-9.73%) and the Lipper Mutual Fund index (9.54%.)

“Last year was the first year, in perhaps five, that hedge funds really provided their mettle,” added Ross Ellis, a consultant at Oaks, Pennsylvania-based SEI Investments.

Charles Gradante, a principal at the Hennessee Group, said it is clear that more institutions are choosing to investment with hedge funds. Preliminary figures from the Hennessee Group’s soon-to-be completed annual survey show a large jump in institutional investors.

“The initial results … indicate … 20001 will entail the largest increase in institutional allocations to hedge funds--ever,” Gradante said.

Market Neutral, Arb Strats Seen as Top Picks

Marker neutral hedge funds, which returned 7.05% last year, according to the Hennessee Hedge Fund review, will continue to be in top demand, predicted consultants and hedge fund managers.

These funds have relatively low volatility, and though their returns may fall far short of stellar, they are uncorrelated to the traditional bond and stock markets. Because of this sector’s characteristics, Joseph Aaron, president of hedge fund consultancy Wood, Hat & Silver, said he felt it would continue to be a good fit for institutional investors.

Merger and convertible arbitrage strategies, which according to Hennessee, returned 17% and 8.61%, respectively, in 2000, will also be strong draws for institutional monies, predicted Jones. Whereas most hedge funds often tinker with their styles, the arbitrage strategies tend to stay more true to form, he noted.

Institutional investors are far less tolerant to style drift than affluent investors.

For those looking for higher returns and willing to take on more risk, healthcare/biotech and distressed debt strategies are worth watching, consultants recommended.

The healthcare/biotech and distressed debt strategies are worth watching, consultants recommended.

The healthcare/biotech sector, which was the top-performing last year at 62.37%, could present a high-risk, high-reward opportunity through the first half of the year, predicted Richard Bookbinder, a general partner and portfolio manager for Roebling Fund LP,