Majority of hedge funds fail to live up to label says industry expert

70% of hedge funds, including those classed as alternative investments under EU regulation, do not short stock or hedge against other holdings in the fund, says Jérôme de Lavenère Lussan CEO of the consultancy Laven Partners which advises funds on regulation.

The majority of funds, described as hedge funds, do not behave as such, says Lussan who argues that the misuse of labelling is more worrying than any sign of weakening returns.

Managers of such funds, ‘work more like traditional managers against an index than hedge funds in the true sense.’

‘The funds are run more like equity and bond funds rather than private equity, which is really what they should be seen as.’

More than a name

Hedge funds posted their second  worst performance ever in 2011, according to data from the Eurekahedge Hedge Fund Index released yesterday. Yet this data is ‘irrelevant’, says Laven.

‘You can’t look at hedge funds against an index because the whole nature of their strategy is that it is diverse.’

Far from mainstream investment, the split between different kinds of hedge funds is wider than before.

A European Commission directive in 2010 allowed for a label of regulated alternative investment, otherwise known as ‘newcits’, to include some hedge funds.

‘Active management is not the industry problem. Most of those classed as hedge funds are highly correlated to beta strategies.'

The Eurekahedge Hedge Fund Index was down 4.1% in 2011. Asset inflows for the year totalled $67 billion bringing the total industry to $1.2 trillion.