Hedge Funds Favour Old Economy Stocks

Caroline Maxwell, Investors Offshore.com

19 February 2001

Recent research has shown that the new wave of smaller, niche hedge funds are favouring old-economy stocks in 2001, following the dramatic fall from grace of technology stocks in the latter part of last year.

Banks and other financial institutions offering private banking services are increasingly looking to alternative investments as a way to hedge against a bear market, and fund managers appear to be going back to basics, utilising strategies such as relative value investing.

Mark Schwartz, general partner of the US based investment firm Newcastle Partners, explained that areas ignored by investors in happier times (happier for the tech companies, at any rate!) such as buyouts and value investing, a strategy which favours good stocks at great prices rather than great stocks at good prices, are now catching the eye of smaller hedge fund managers: 'The low-valued companies have not benefited from the run-up in tech stocks. Cheap old-economy companies, small-market-cap companies, that's what we've been interested in.'

Schwartz believes that the industry's optimism for the second quarter is unfounded, and that this sentiment is all that is keeping the economic slowdown relatively mild. He feels that if things do not begin to pick up soon, investors' optimism will dissipate, and a stock market downturn is probably on the cards. 'That's why', he added, 'more economically sensitive strategies are needed.'

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