With the next bull market due at some stage, the focus will surely move away from absolute return products.  Is this the real reason why the Wellcome Trust is currently trying to sell its £3.5 bln private equity portfolio so as to be able to re-invest in equities and/or corporate debt in time for the next upswing?  They have found a plausible excuse with Sterling’s recent collapse from $2.00 to $1.50, claiming that they are trying to lock in a currency gain on their dollar-denominated private equity portfolio…

This bear market will end one day and hedge funds have not provided much protection from the bear.  The key idea behind hedge funds is wonderful (actively-managed funds which aim to beat the return offered by a savings account) but maybe Warren Buffett was right when he concluded that they were compensation structures first & foremost.  In order to participate in the next bull market you do not want to be stuck in a fund which may not fully participate in the upside (due to past scars from the bear they may not dance fully with the bull) and is going to take away 20% of that upside in fees anyway.

Note :  In theory hedge funds which suffer a decline in NAV are not paid their (typical) 20% fee on profits until the fund’s NAV exceeds its prior “high-water mark”.  Therefore investors who choose to stay aboard for the potential ride back up would not suffer 20% of the upside being taken away from them in fees.  However in practice what tends to happen is that hedge funds which perform badly close down and investors then have to invest any money they may be lucky enough to get back in a different fund which then takes 20% of the upside.