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Hedge funds poised to seize upon distressed opportunities, says F&C’s Barthélémy

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As the sub-prime crisis continues to unfold, attractive opportunities are emerging for the hedge fund sector, according to François Barthélémy, a partner at F&C Pa

As the sub-prime crisis continues to unfold, attractive opportunities are emerging for the hedge fund sector, according to François Barthélémy, a partner at F&C Partners. Despite the recent volatility that led many to describe November as the bloodiest month for hedge funds, the sector is well positioned to benefit from the current turmoil.

‘Hedge funds tend to suffer in very volatile environments but well-managed portfolios often recover quickly, once the market has come back to some sort of rational pricing of assets,’ Barthélémy says. ‘The real question that people are struggling with is that there are a number of signs indicating that we might be moving into recession territory. We have had three great years where the way to make money was about growth and it seems we are now moving into a very different environment.’

Irrespective of whether there is a recession ahead of us, Barthélémy says the sub-prime crisis has generated a number of very attractive opportunities for the hedge fund sector especially in distressed assets. The balance sheets of many banks and insurance companies are burdened by impaired credit assets and accumulated losses have destroyed large chunks of capital, constraining their ability to write further business going forward.

‘The solution requires the raising of fresh capital and the selling of impaired assets to investors who will have the ability to work them through bankruptcies or restructuring,’ he says. ‘Only hedge funds have the legal and investment expertise to buy that type of assets and they are likely to do really well as a result of it.’

Between December 2000 and December 2004, the Credit Suisse Tremont Distressed Hedge Fund Index was up 72 per cent, while the MSCI World Index was down 2 per cent. ‘We expect the next few years will see a repeat of this scenario,’ he says.

Outside distressed assets, there are also attractive opportunities in a number of traditional investment sectors but not on a standalone basis. ‘While alpha is now easier to find, the beta of the market may kill you,’ Barthélémy says. ‘This means it is the best of times for hedged strategies that aim to take most of the beta out of the return.’

Barthélémy, whose team is responsible for the management of the F&C Balanced Alpha Fund of Hedge Funds and the F&C Select Alpha Fund of Hedge Funds, concludes: ‘There is not doubt the world is very volatile and I don’t think that buying just equity will work in the next few years. Volatility is not going to go away for a while and you will need a strategy that can cope with that. For me that means hedge funds.’

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