Addicted to Alpha: Why the hedges are starting to shun equities.

Hedge funds pursuing multi-asset class and fixed income-related trading strategies are an increasingly important segment of the industry, according to a new report from m.a.partners, an independent management consultancy. In a nutshell; the traditional hedge fund strategy of long-short equity, for example, has returned only 0.53 per cent this year.

Richard Spencer, partner at m.a.partners, expects these two categories to account for half of all hedge fund assets under management by the end of 2006. Recent estimates put the global hedge fund industry's assets at $1,500bn.

The industry was previously dominated by equity-related strategies. According to Hedge Fund Research, global hedge fund industry assets five years ago amounted to $539bn, of which 63.6 per cent was allocated to equity-related strategies. However, as of the first quarter of 2006, HFR estimated that nearly one-third of all new assets allocated to the hedge fund industry was entering strategies that used multiple asset classes and a further 12 per cent was being allocated to pure fixed-income related strategies.

James Vinci, managing director in Morgan Stanley's prime brokerage business, which focuses on serving the needs of hedge funds, said that one reason for this change was the development of a growing number of derivatives products.

"Credit default swaps and other products have made capital structure arbitrage [exploiting differences between asset types] a lot easier – you can now expand your fundamental view of a company into all securities markets," Mr Vinci said.

The need to find returns in other asset classes has become more important as equity-related strategies have become increasingly crowded – with growing numbers of hedge funds all trying to trade on the same perceived opportunities.

http://msnbc.msn.com/id/14348893/