Alpha - September 2007 - (Page 41)

Market Turmoil global head of quantitative equity strategies at Lehman Brothers, wrote a now-infamous plea for the industry to remain calm on Thursday, August 9, claiming that “events that models only predicted would happen once in 10,000 years happened every day for three days.” Not all investors think the meltdown so rare. “Every five years or so, managers that use a lot of external leverage take a big hit,” says D. Ellen Shuman, chief investment officer of Carnegie Corp. of New York, a nearly $3 billion philanthropic foundation, who refuses to invest with hedge funds that use leverage to juice up their returns. “It happens like clockwork, and yet no one seems to get any wiser.” Beware of managers addicted to beta. The surge in the number of hedge funds over the past five years has introduced an unprecedented amount of competition between managers that are essentially trying to mine the same market anomalies for profits. In the mild and rising markets of the past three years, the temptation to go long was strong indeed. This led to the kind of herding behavior that investors have come to deplore; after all, hedge funds were supposed to be alternativeinvestment strategies, not alternative (and expensive) providers of beta. The recent market volatility will likely reveal those managers that have never had their ability to hedge truly tested. “The tailwinds that have been supporting hedge fund managers for the past two years are simply not there anymore,” says Ivy’s Davies. “And they are not likely to return for some time. Current market conditions will absolutely expose managers who have been insufﬁciently active in managing risk.” Investors may have to brace themselves for more bad news in the months ahead as the subprime mess worsens. At the end of June, the rate of foreclosures was 5.52 percent of the total pool of subprime mortgages in the U.S. — far below the peak of 9.35 percent recorded at the end of 2001, according to the Mortgage Bankers Association, but still dangerously high. That total is likely to surge in the months ahead. Delinquencies, which are solid predictors of foreclosures, touched 14.8 percent by the end of June — perilously close to the record high of 14.96 percent in 2002. Makena’s Ross believes that volatility is back with a vengeance — and that the scarcity of true alpha, once revealed, will drive some investors away from hedge funds entirely. “What has not been fully exposed yet — and may continue to shock investors — is the amount of equity beta that is in the hedge fund industry,” Ross says. “If and when the equity markets sell off, there is going to be even broader-based disappointment with hedge fund returns.” Senior Writer Frances Denmark contributed to this article. Alpha Sponsored Statement Serviced Apartments Like No Other A n executive’s life in Hong Kong is hectic. Top people at financial institutions, especially, must deal with tremendous workloads every day. When they finally get home, it’s questionable whether they have the energy to tend to housekeeping and other chores. For this reason, serviced apartments at monthly rentals have become popular, particularly among expatriate executives. Today’s high-end serviced apartments are located mostly in Central, Mid-Levels, Causeway Bay, Wanchai and Tsimshatsui. They are all well-furnished, with harbor views and convenient to work and transportation. But while most serviced apartments in Hong Kong are similar to a hotel suite, Causeway Bay Apartment O gives you that cozy feeling of being at your own home. The unique colonial design creates an experience quite unlike that in any mainstream hotel. Each of the 15 apartments is different – the luxurious For details, please go to: www.apartmento.com.hk three-bedroom units are furnished throughout with exquisite period furniture and artwork that bring you back to the last glory days of Old Shanghai or the colonial grandeur of Old Hong Kong. Apartment O offers many unique details that set it apart from standard serviced apartments. Because of strong demand, waiting lists for the most expensive now run six months, and rents will be increased by 10 percent. Anyone expecting to relocate to Hong Kong should reserve a serviced apartment in advance. http://www.apartmento.com.hk

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

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