August 11th, 2011
01:01 AM GMT
London (CNN) – As world markets remain in turmoil and economists bet on a return to recession, hedge fund managers are being given another chance to prove they are worth their hefty pay packets.
Hedge funds are similar to mutual funds in that they raise capital from investors and pool it together.
But it’s what they do with that money that makes them different.
Like other funds, they measure their performance against an index buying stocks, bonds, commodities and currencies. Yet, hedge funds also use an array of sophisticated investment techniques which allow them to make money not just when markets are rising but when they are falling as well.
These include tools like ‘short selling’ or the borrowing and selling of a stock with the hope of buying it back cheaper at a later date and pocketing the difference.
Hedge funds charge mega bucks to manage big money. The industry oversees just shy of $2 trillion. A typical fund charges management fees equal to 2% of assets and a performance bonus of 20 % when it outpaces its benchmark.
The business is lucrative but risky.
Global hedge funds earned $100 billion in the first three months of this year. But in 2008 the picture couldn’t have been more different: as the credit crunch struck such funds lost a third of their value and hundreds shut their doors.
One that survived is Hampstead Capital, a $700 million fund and family office based in London’s Covent Garden theatre district.
Founding partner Lex van Dam has traded the markets for two decades at top-draw names like Goldman Sachs and the hedge fund GLG Partners.
“It’s very stressful. Especially at the moment. You have to second-guess everything, everyone.”
On a typical day, van Dam says he’s chained to his desk between 7 am and 5 pm. After work he follows the U.S. markets from home and wakes up twice during the night to monitor Asia’s performance.
The décor may be swish and the view breathtaking but it’s the technology at Hampstead Capital HQ that impresses the most.
Walls of 24-inch plasma trading screens display charts and models, flashing in real time as markets move.
The equipment looks expensive but is it essential?
Van Dam reckons it is. “There are so many asset classes out there and they are all correlated. Everybody looks at everything, everybody is paranoid.
“There are computers in there that just trade and trade and trade. So, for every one trade done by a human there’s probably 10 that are done by a computer.”
My visit coincides with the start of the trading day in America and, as if to illustrate van Dam’s point, markets on both sides of the Atlantic turn sharply lower in the blink of an eye.
One portfolio manager expresses frustration at the Greek authorities’ recent decision to ban short-selling. Another questions how one French bank can be up 7% one minute then down by the same amount the next.
“You have to follow everybody: the politicians, the ECB, the market, the regulators,” says van Dam. “That makes it really difficult.”
Van Dam it seems is a man of contradictions though. Whilst insisting technology is essential, he is also adamant anybody can learn the tricks of the trade.
To prove his point he put up $1 million dollars to teach 12 laymen how to trade for the 2009 BBC2 reality television series ‘Million Dollar Traders.”
“Most hedge funds pretend what they do is really difficult but it isn’t. You just have to identify companies you want to own. A lot of people can do this themselves.”
What a lot of people can’t do is figure out where to put their money these days though.
So, what would van Dam recommend?
Even at over $1,770 an ounce, this 43-year old Dutchman is a buyer of gold. "There isn’t enough of it. You can’t print more of it."
Van Dam says those with liquidity have three options."Either you buy gold, or you buy government bonds or you put it in the bank."
Times must be turbulent if even high-tech hedge fund types aren’t taking any risks.
Mind you, van Dam says his fund is up 30% against the MSCI, so he must be doing something right.
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