The Hedge Index

Last year when Warren Buffet called Hedge Funds "weapons of mass destruction" we took a cursory look at them (the hedge funds not the weapons) in this column. Our conclusion was more on the Han Blix than the George Bush side. We could find no evidence that these weapons of mass destruction were about to wipe out the investment world as we know and love it.
A year on what has happened to the hedge fund industry?
Well if you'll excuse the pun it has continued to expand at an explosive rate.
According to industry think- tank "Hedge Fund Research", assets under management by hedge funds rose about 60% between the end of 2000 and the end of 2003
to US$815 billion and now in the middle of 2004 has reached valuations of US$1Trillion.

Japan's largest pension fund is looking to allocate assets to alternative investments including hedge funds. This will probably open the way for other Asian institutional money managers to follow suit.
Germany also joined a host of other European countries in easing regulations governing hedge funds, as the asset class continues to gain widening acceptance from investors and regulators alike.
In the UK which has traditionally lagged behind other countries in investing in hedge funds, Man investments (The biggest hedge fund in the world) have signed a new institutional mandate and entered into a distribution agreement with a major retail financial services group. They feel confident that this market will continue to evolve.
Can it be that hedge funds are moving into the mainstream as an established asset class because they have proved their ability to deliver solid risk adjusted returns in almost all market conditions?
It is difficult to give a snapshot here of how the investment philosophy of a multi-manager hedge fund can generate risk adjusted returns superior to those gained from mainstream equity and bond markets. But let me try.
"Glenwood", one of the most experienced funds of hedge fund managers believe that returns are a function of the risk taken. We can look at an overview of the investment process.
Phase 1 Strategy Selection. Identify and assess strategy opportunities and risks. Select strategies with definable source of added value.

Phase 2 Managers Selection. Identify managers with attractive prospects. Manager due diligence.

Phase 3 Portfolio Construction. Intelligent combination of strategies and manager. Balance investment objectives and optimal risk diversification.

Phase 4 Monitoring and Risk Management. Set an appropriate monitoring level for each manager. Actively monitor managers, strategies and portfolio.
Avoid potentially damaging allocations and make appropriate changes.

This qualitative analysis is not what hedge fund critics either expect or understand. Critics usually dismiss the industry as reckless and devious with client's money. The opposite is true. Good hedge funds usually attract strong demand which allows them to be extremely selective about who invests with them. They avoid "hot-money" that trade in and out of the fund with short time periods and demand that investors add value to be eligible to invest Furthermore potential investors should understand the strategy the fund manager is pursuing to avoid asking for meetings with the manager during difficult market environments.
Glenwood is well known in the hedge fund industry and benefits from a good reputation as a reliable and knowledgeable investor. Hedge funds are comfortable with Glenwood being one of their investors since any investment is only done following an in depth due diligence report.,
And finally let me put a smile on the face of Man investors.
Man Investments won in four categories at the first ever Euomoney Private Banking Awards. The awards included Best provider of hedge funds and Managed Futures in Western Europe, Asia, Hong Kong and Singapore. They also added to their laurels by winning the hedge fund category of the ninth Global Investor Awards for Investment Excellence.
None of this seems detrimental to client's best interests.