I recently spoke at the World Alternative Investment Summit in Niagara, Canada, and for such a prestigious, well organized event, I was somewhat surprised by the lack of attendance and the overall mood of the conference.   We all know that times are tough for hedge funds right now, but the performance numbers don’t speak as loudly as seeing the faces of hedge fund managers and investors.   Over the years, hedge funds have been attractive because they have produced good returns and have been an alternative to traditional investments.  However, since they are so closely correlated to the markets they have definitely taken a dent to their reputation lately, and many have ceased to be effective or profitable as a result  The obvious reason has been market correlation and the down market has annihilated those correlated strategies.  US funds hover somewhere around a 60% correlation to the S&P, while Canadian hedge funds have something close to an 80% correlation to the Toronto Stock Exchange(TSX).  Since many of these funds have fallen so much, many of their investors are starting to exercise their right of redemption.   This has been widely reported and there is something interesting to note.  Many fund managers are in an almost stifling position because in order to cover the redemptions they may need to raise additional capital through new investors.  Finding new investors to invest in a strategy that has been showing losses, in a market that doesn’t have any impetus to move up, is like convincing someone it is safe to fly in a plane with no wings.  It’s just not worth the risk.  The two questions that are on every investor’s mind are when will the downturn end and what to invest in since everything is down and moving down further?  In historic times, it’s impossible to predict the future since there isn’t a past event to compare it to, so an end cannot be predicted.  As far as investing goes, the only way to possibly shelter your portfolio from the market is to not be invested in the market.  In other words, seeking private alternative investments that are not directly correlated to global financial markets could hedge against a portfolio that is weighted in equities.  We are way past the days of investing in an equity-based hedge fund strategy and calling it an alternative investment.  Extraordinary times bring about new paradigms, and at this point private investments are the definition of alternative investments.  The general perception within the markets right now is that we are in a possible free fall.  There doesn’t seem to be anything on the horizon that would motivate a turnaround, and since perception is everything, the fall is real and the plane has no wings.

Copyright: Dominic Mazzone, Regent Global Funds 2008