Become smarter when covering hedge funds by talking to them

By Dave Wilson

Columnist, Bloomberg News

(Editor's Note: SABEW board member Dave Wilson covered a session on smarter hedge fund coverage at the fall SABEW conference held Oct. 20-21.)

CHAPEL HILL, N.C. -- "The longer that you've been comfortable, the more likely it is that you won't shoot yourself in the foot -- you'll shoot yourself in the brain.''

This comment came from Elliot Bossen, chief investment officer at Silverback
Asset Management, about the dangers of sticking with any investment strategy enlivened a panel discussion on ``Smarter Fund Coverage'' during SABEW's fall conference.

Bossen is a hedge-fund manager who specializes in convertible-bond
arbitrage, or profiting from price differences between debt securities and the underlying shares. He was one of three North Carolina-based money managers that provided insights into what they do and what concerns them.

Tracking down people who have opposing views on an investment and hearing them out is essential to good decision making, according to Bossen and Eugene Flood, chief executive officer of Smith Breeden Associates.

Flood, (right) whose firm manages money for institutions such as pension funds and insurance companies, also said the expertise that hedge funds bring to their investing doesn't mean markets are becoming less risky.

"When 20 people have to get out the same door at the same time, it gets very hard,'' he said, referring to this summer's bout of selling by so-called quantitative funds, which rely on statistical analysis to make decisions.

Another trend that the panel addressed is the increasing demand from
institutions for hedge funds, private-equity funds and other alternatives to stocks and bonds.

"It's classic behavior -- chasing performance by buying what you wish you had bought and selling what you wish you had sold,'' said Mike Hennessey, managing director of investments at Morgan Creek Capital Management.

Hennessey's firm sells funds of funds, which provide access to several strategies with a single investment. He described them as "Lego blocks'' for smaller endowments and foundations looking to diversify.

The discussion also touched on the topic of sovereign-wealth funds, created by countries such as China, Norway and Singapore to invest some of their savings.

"For the most part, they aren't talking about what they are investing in,'' Flood said. Even so, he added, the funds "overall are having a good impact on the world economy'' by making more money available to finance growth.

Bossen had a different take on their effect. "They tend to buy at the top and sell back to us at the bottom,'' he said.

The panelists were divided on the value of financial-information sources such as Morningstar Inc., a company best known for its star ratings of mutual funds.

"There are lots of resources available to investors and almost all of them are no good,'' Bossen said.
Hennessey, in response, said Morningstar does a good job even though its reports only ``skim the surface'' of what's available.

Hennessey also recommended two books by David Swensen, Yale University's chief investment officer. Swensen is the author of "Unconventional Success,'' published in 2005, and "Pioneering Portfolio Management,'' from five years earlier.

Gail MarksJarvis, a personal-finance columnist for the Chicago Tribune, served as moderator. She shared her insights about where each manager fit into the world of investing.

Posted Oct. 31, 2007