A January Tradition: Investors’ love/hate relationship with hedge funds.

lovehateHedge funds: you either love ’em or hate ’em, right?

Well, it appears that investors and commentators may actually love them and hate them at the same time.  As Wikipedia defines a “love-hate relationship:”

“…a personal relationship involving simultaneous or alternating emotions of love and enmity. This relationship does not have to be of a romantic nature, and may be instead of a sibling one. It may occur when people have completely lost the intimacy within a loving relationship, yet still retain some passion for, or perhaps some commitment to, each other.”

It seems that every January, there is a proliferation of media stories about how – despite their apparent disdain for hedge funds –  investors show a commitment to hedge funds by clamoring to mimic them through either a) hedge fund replication products or b) “hedged” mutual funds.

For example, in January 2007, we wrote about how 2007 could be the “year of hedge fund/mutual fund convergence.”  Then, in January 2008, we reported on a paper that explored whether single sector hedge funds by investing in ETFs.  And last February we wondered if hedge fund replication was “coming back from the dead.

Coincidence?  Probably not.  Although investors and industry commentators are prone to lashing out at the hedge fund industry’s modus operandi, they apparently have a secret love interest with hedge fund investment strategies.   It seems that January invariably brings with it a reflection on the previous year’s relative returns and a debate about whether hedge fund fees were actually good value.  This year seems no different…

On December 28, the Wall Street Journal cited investors’ motivations to (continue to) explore hedge fund clones:

“Investors, many weary of hedge funds’ high fees and long lock-up periods, are diving into replicators…Investors are likely to hear more about clones in the coming months.”

U.S. News and World Report reported on December 30 that the lined between hedge funds and mutual funds were getting “blurrier”:

“Throughout their histories, hedge funds and mutual funds have often been thought of as polar opposites. But with the rise of long-short mutual funds, the line between the two industries is starting to get a bit blurrier.”

As our January 2007 post suggests, these lines are not “starting” to get blurrier – they have been blurring for some time.

This week, Barron’s forecasts retaliation from the hedge fund industry:

“One trends of 2009: mutual funds seeking hedge-fund-like returns by using hedge-fund strategies while offering mutual-fund transparency. A possible trend of 2010: hedge funds striking back by going after institutional money that traditionally has been overseen by mutual funds.”

Investment News reports on January 4 that adviser interest in hedge fund replication and hedged mutual funds is driven by a lament about hedge fund fees:

“There’s no good reason for investors to pay a 2% management fee and a 20% performance fee for returns that are comparable to those now showing up in investible indexes, hedge fund replication strategies and even in a growing list of mutual funds.”

Investment News also reports that the 90+ hedged mutual funds tracked by Morningstar took in $11 billion by November 30 of last year – compared to a net outflow of $18 billion from all other equity mutual funds.  It’s no wonder that Morningstar has recently beefed up its hedge fund presence with the hiring of industry veteran Tim Galbraith.

This January, we’re reminded yet again that whether investors love hedge funds or hate them, there is apparently some kind of enduring “commitment” to them.

You gotta love it (…and hate it).

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