European Banks Seek To Capitalise On Hedge Fund Growth

by Phillip Morton, Investors Offshore.com

26 August 2003

European banks are attempting to trade on the success of the burgeoning hedge fund industry by offering investors insurance and derivative products that use hedge fund portfolios as their underlying asset base, according to a report in the Wall Street Journal.

The trend began back in 1997 when French banks Paribas (now BNP Paribas) and Societe Generale started issuing capital protection bonds which protected investors against losses on their hedge fund exposures. The instruments are typically long-dated, between seven and ten years, and guarantee the initial investment, with the investor also benefiting from any growth in the fund's value.

Mehraj Mattoo, head of Dresdner Kleinwort Wasserstein's alternative investment group, told the WSJ that the structured hedge fund business had now grown to a total value of $50 billion in his estimation.

Mr Mattoo also explained to the Journal that small and medium sized pension and insurance firms do not have the resources required to calculate and balance risk in their portfolio.

"You need between 20 and 50 hedge funds out of the 7,000-odd hedge funds to cover the risks properly, and banks have strong balance sheets as well as extensive knowledge of the financial industry and its products. This gives them the credibility that an investment committee will want before it exposes its fund to hedge funds," the WSJ quoted Matthoo as saying.

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