It’s a safe bet that a firm like Union Bancaire Privee pretty much knows what it’s talking about, so when the world’s second-largest hedge fund manager says hedgies will make more money in stocks than in bonds next year, it’s worth lending an ear. Just look at the indices: The Standard & Poor’s 500 has climbed an average of 11% for the first 10 months of the year, while the Lehman Brothers Aggregate Bond index has struggled to reach 4.6%. Jan-Erik Frogg, UBP’s head of alternative investments, told Economic Times that growth in 2007 will be “significantly equity-driven” – and event driven – and depending a lot less on profit from declining prices. “We’re starting to see bigger margins in M&A, as well as higher volumes,” Frogg said, praising the rising risk-reward ratio in such deals. So savvy hedge funds wanting to capitalize on the trend may want to follow the No. 2 leader and “focus on strategies that are equity-driven, namely long/short equity, knowing that the short component isn’t very dominant,” according to Frogg. Event-driven hedge funds – which according to the Credit Suisse Tremont Index have averaged about 12% in the first 10 months of 2006 – are “better protected when the markets go south as you have an implicit hedge because the stock is undervalued and underinvested,” Frogg explained. And that’s the kind of advice you can take to the bank.
