Saturday, September 29, 2007

Brand it like a hedge fund.

It's interesting to contemplate the growth of the hedge fund industry over the last few years and the amount of money that has flowed into them. The Wall Street Journal put it best saying that they had sprung up 'like weeds'.

As we have commented before, however, a lot of so-called 'hedge' funds are not strictly doing what it says on the tin. For example, how many times have you heard the phrase 'long only hedge fund'?

How can a fund have a hedging element if it is 'long only'? It seems to me that the branding of funds over the last few years has changed and any mention of the fund being called a hedge fund has set the pulses racing of investors and lead to them opening their wallets to, what amounts to, an aggressive and expensive, mutual fund.

Wouldn't you (or have you!) done the same? If you call your fund a mutual fund you are immediately lumped in with the words 'boring', 'stable' and 'not very good performer' (whether it is or not). If you call your fund a 'long only hedge fund' you are projecting an image of 'sexy', 'exciting' and 'good performance'.

I know this may not be the case at all and we should probably put 'risky' in the definition for hedge funds but you can see why a lot of funds that are not traditionally hedged investments have taken up the brand. It is the phrase 'hedge fund' that is capturing the brand value of the sector and consequently everyone is using it.

It will be very interesting to see what happens next year as the credit crunch takes hold and the affects of this 'wipe out' some hedge fund as was recently suggested by Anthony Bolton of Fidelity. Will the brand of 'hedge funds' still be as sexy? It is a tough call but I can see a few funds quietly moving away from the term if things get too tough.

Think of the dot com era (version 1) where everyone was scrabbling to call themselves 'something'.com ahead of their floatation, hoping to get in more dollars and a bigger valuation because they had some spurious link to the Internet. How many companies in the following years after the bubble burst changed their names to anything other than 'something'.com?

The cult of the hedge fund brand has grown unabated for the last few years. I first heard the term from a business partner in 1997 who had a 'quant' fund. (It was the first time I had heard that too). He did his best to explain to me what the whole situation was about, but I could not get my head around it and was in the middle of building a commodity broking business so did not pay too much attention. In what was a huge mistake in my hunt for personal fortune, I just didn't think it was lucrative or sexy enough. As my son would say, aping Homer Simpson, ... Doh!

Of course the hedge fund industry won't disappear, it may be just a little unfashionable for a company to use the 'brand name'. As in the fashion industry, styles come and go. In the eighties 'risk arbitrage funds' were all the rage, made famous (or infamous, should I say) by Ivan Boesky, the arbitrage trader convicted for insider trading. Maybe we will see this particular fund brand name come back into fashion with a squeaky clean new updated image.

Some have said that the current hedge fund situation is a mirror of the tech bubble, but I use the example above as a branding issue not a comment on whether the hedge funds success is a bubble like we saw in the early part of this decade in the tech market.

The difference is one of simple economics, hedge funds make money and have real product, albeit dematerialised bits of paper giving ownership, if only fleetingly, in companies that make real, saleable products.

No, Och-Ziff is no that is for sure but it may be time for some to have a hedge in place on their fund branding strategy.

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