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MARKET COMMENT
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Hedge funds. It's the latest fad. Like all fads, it will be popular for a time, before largely fading back into the wilderness. To the uninitiated, a hedge fund aims to make money whatever way the stock market is moving. Just like any normal fund, it will aim to buy shares with a view to achieving capital growth. But it will also short shares -- selling shares with a view to buying them back when prices fall. The theory goes that hedge funds will prosper both in rising and falling markets. So much for the theory. What many people fail to recognise is that it is just as difficult to successfully short stocks as it is to go long on (i.e. buy) them. The right time to start a hedge fund was in March last year, when the stock market was at its irrationally exuberant peak. Back then, surely every man and his dog knew shares were overvalued, and that was exactly the time to "go short". But where were they? Where were all the hedge funds? There were odd pockets of them, but like shorting stocks, they were completely out of favour. With the stock market and in particular tech shares jumping higher and higher on a daily basis, it was easy to make money by buying shares. Fast forward to today. The stock market is falling like a rock. Every day, a few more percent is wiped off the value of the main indices. Individual tech shares are showing double digit percentage losses on a daily basis. The easy money is to be made by shorting stocks. It's March 2000 repeated, only in reverse. In the not too distant future, I can see a time when we have another bubble waiting to burst. It will be known as the bear market bubble. Although the bubble may not yet be at its peak -- i.e. when the stock market is at its lowest point in this particular cycle -- the number of new hedge funds and the amount of easy money to be made by shorting shares gives a clear contrarian signal. In the long term, going against the crowd gives investors the best chance of beating the returns of the market. And that means buying when all others are selling. Your timing won't be perfect, but it doesn't need to be for the long-term, patient investor. Come 2003, I'm betting on hedge funds being very much a niche product again, just as they were 12-18 months ago. More On Hedge Funds Peter Temple previews his forthcoming book Hedge Funds: The Courtesans of Capitalism, published by John Wiley, RRP price £24.95. Buy it at Amazon for £19.96.