Experts Warn Of Hedge Fund Pitfalls

by Philip Morton, Investors Offshore.com

11 September 2001

Despite the growing popularity of hedge fund investment, experts are warning that the flexible funds are not a panacea in today's uncertain markets.

According to a recent survey conducted by Tass Research, in the second quarter of 2001, inflows into hedge funds rose to $8.4 billion, more than for the whole of last year. However, in order to maintain their nimbleness, which allows managers to short stocks and employ more exotic financial instruments than normal mutual fund managers, hedge funds must keep their asset sizes down. This, according to Tass, has led to an inevitable dilution of talent as more and more hedge funds have opened. Worldwide, there are estimated to be at least 4,500 hedge funds in operation, an increase of 1,500 from the end of 1999.

Strategist at Morgan Stanley, Barton Biggs, warned US clients recently that the hedge fund phenomenon was in danger of spiralling out of control, with the increasing interest from retail investors contributing to the fact that it was 'rapidly assuming all the characteristics of a bubble'. Although as a group hedge funds have performed well this year, outperforming the major indices, he warned that investors should be cautious, and should make themselves aware of the potential risks inherent in the investment vehicle before leaping onto the bandwagon.

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