Priority Investments Ltd.'s Israeli hedge fund index, Hedge Fund Priority Index (HFPI) fell 0.85% in July, compared with a 4.66% drop by its benchmark, the Tel Aviv 25 Index. However, the Hedge Fund Research Inc. (HFRI) fund weighted composite index fell 2.17% compared with a 0.98% drop by the S&P 500 Index.
During the first half of July, high oil prices continued to trouble the US economy, and weighed down financial stocks, which weakened the dollar against other currencies. The US government bailout of Fannie Mae (NYSE: FNY) and Freddie Mac (NYSE: FRE), plus the restrictions placed on short sellers, contributed to gains in the second half of the month.
Hedge funds that held long positions on oil and short positions on financial stocks were hit by the reversal in the market direction, as in mid-month they faced the sharp drop in oil prices on one hand and the jump in financial stocks on the other. Hedge funds were unable to exploit the bear market, and the HFPI fell 10.2% in January-July and the HFRI fell 3.43%. Both indices nevertheless outperformed the benchmark indices: the Tel Aviv 25 Index fell 14.9% in January-July and the S&P 500 fell 13.68%.
Israel's hedge fund industry is miniscule compared with its New York and London counterparts, with most funds managing just a few tens of millions of dollars. According to hedgefund.net, half of the world's hedge funds that manage less than $15 million each have closed since the beginning of the year, suggesting that the Israeli hedge fund industry will face trying times.
In contrast to the large hedge funds, small funds have no reserves to absorb losses. The 100 top hedge funds ranked by "Alpha" shows that the 23 largest funds have an aggregate $1.35 trillion under management - 75% of all hedge fund assets. The top three firms are JP Morgan Asset Management, with $44.7 billion in assets under management, Bridgewater Associates, with $36 billion, and Farallon Capital Management, with $36 billion.
Nevertheless, the small Israeli hedge funds can compete with the huge foreign funds. To do so, they must achieve relative advantages by investing in niches, conservatively manage deposit risk, and, most of all, by focusing.
Israeli hedge funds that mainly invest in the domestic market easily conform to the first rule. As for the other funds that invest in global markets, their best strategy is to fly under the radar. Risk management at small hedge funds is an essential condition for surviving market shocks. As for the third rule, "focus", fund managers should outsource their operational activity. Despite the high costs, the fund managers should concentrate on what they do best, and not waste time putting out fires in the business.
Eyal Lasker is a hedge funds analyst at Priority Investments.
Published by Globes [online], Israel business news - www.globes-online.com - on September 1, 2008
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