By Lee Hyo-sik
Staff Reporter
Investment banks and other main street financial institutions, not hedge funds, are the main culprits behind the ongoing financial market mess by taking excessive risks, according to a London-based hedge fund manager.
In an interview with The Korea Times, Thomas Della Casa, head of research, analysis and strategy group at Man Investments, said hedge funds have not taken as much risk as investment banks and commercial lenders in recent years, adding the hedge fund industry has steadily reduced leverage.
``Hedge funds have been deleveraging over the past few years. On the other hand, investment bankers and other financial managers borrowed heavily to invest in derivatives and other financially engineered products for greater profits. We are part of the international financial system and we manage risks better than other big-name financial institutions,'' he said, strongly defending the hedge fund industry against the criticism that it played a major role in causing the current global credit mess.
Hedge funds ― typically open to only a limited range of investors ― practice arbitrage and buy and sell undervalued securities, trades options or bonds and invest in almost any market, if there is a good opportunity. They can offer alternative investment opportunities to investors looking to divest money from fixed-income, equities and other traditional asset classes.
But they are usually exempt from direct regulation by regulatory bodies and can increase financial market uncertainties by pursuing excessive short-term returns and herding to exploit fragile and underdeveloped markets.
Della Casa said his company is coping well with the global market trend because it has a diversified investment portfolio. ``We have been disposing of equities and other riskier assets around the globe over the past year to secure cash. I think we are in a better position than other hedge funds, not to mention investment banks, to tide over the global financial market debacle.''
The Switzerland-born manager then said the hedge fund industry has performed better than the overall global equity market. ``The sector posted a 15-percent loss in 2008, much lower than the average 50-percent drop in the global stock indexes,'' he said, expecting shallow returns for the sector over the next few years because of the continuing deleveraging process.
There have been and will be significant write downs of bad assets by financial firms and they will become more reluctant to extend credits to borrowers in order to improve financial health, further accelerating the global deleveraging, Della Casa said.
``As a result, hedge funds will face a harder time accessing necessary credits, dampening their investment activities. The bankruptcy of Lehman Brothers was a turning point for the global financial market. It greatly worsened the magnitude of the credit crunch. The market will not easily come back,'' he said.
Della Casa projected that more banks with high levels of non-performing loans will go under across the globe over the next two years, adding the market will regain confidence from investors only after cleaning the financial market system and the setting of new rules are completed.
Touching on Man Investments' future strategy, the manager said the firm will focus on trading-oriented strategies, which is trend-following and technically driven, not fundamentally driven.
``We are not a mutual fund investor. They try to figure out when the market comes back to make money. But we can generate profits even during the bearish market by closely following the trend with long and short techniques. We will look at all asset categories, including currencies, commodities and bonds, helping us better deal with the ongoing market volatilities,'' Della Casa said.
He then said his company and other hedge funds offer institutional and individual investors alternative opportunities. ``Those who hold an excessive exposure to traditional asset classes of equities, fixed-income and bonds, should consider putting money into hedge funds as a way to diversify their portfolios.''
When the current market turmoil is over, there will be a golden age of hedge funds, Della Casa said.
``At the moment, everybody is in a panic mode and wants to hold cash and gold. But I think convertible bonds and distressed corporate assets are quite cheap and attractive. Given the probability that the current crisis will not develop into the one a decade ago, I think putting money into these assets now will generate handsome profits when the market comes back,'' the manager said.
He then said hedge funds will be the first to detect the changes in the market fundamentals and pick up riskier assets at bargain prices, projecting they will exploit it when the market rebounds in two years.
Della Casa declined to comment on the fund's investment in Korea, only saying that he and other fund managers have been talking with local institutional investors and regulators about the role of the hedge funds and their advantages.
``We will continue to educate the market and investors here. We will learn more about investment opportunities here. But at the moment, the company does not have a plan to establish a foothold in Korea,'' he said, adding the fund will watch the development of the domestic financial market.
Touching on the Capital Market Integration Act, which went into effect early this month, Della Casa said it is a step in the right direction and financial authorities have shown appropriate responses to the needs of the Korean capital market.
The act is primarily designed to break down barriers between banks, securities firms and insurers in a bid to promote competition and thus strengthen the competitiveness of the overall financial industry. It has consolidated 11 rules and regulations in the capital market by function, not by different types of financial entities.
``We are quite pleased about the market development here. Regulators have been doing the right thing. It is really hard to criticize them,'' the manager said.
He then said Korea is in a much better position now than 10 years ago, saying the nation will be one of the first economies to bounce back. ``The situation is quite different from a decade ago. Korea has a different set of conditions. There is no banking crisis and the level of non-performing loans is low. I think Korean lenders will start actively lending money to businesses in the near future, easing the current credit squeeze,'' Della Casa said.
Man Investments, founded in 1983, has a number of hedge funds managing assets worth $79.5 billion as of June last year. It employs 1,600 around the world and has offices in the United States and 12 other countries.