According to UBS Investment Research, traditional fund managers are switching from using benchmark indices to focusing on absolute return models.
Speaking at this week's Hedge 2004 conference in London, Alex Ineichen, Head of Alternative Investment Research at UBS, said 40 years ago asset managers used to aim for absolute or positive returns, but there was little or no specialisation in the different asset classes at that time.
He said: "Now we are coming back to absolute returns with specialisation and control over the probability of losing large amounts of money."
Ineichen said the catalyst for this switch was the prolonged equity bear market.
He noted that traditional fund managers focus on beating benchmark stock or bond market indices. In contrast, hedge funds are motivated by profits and performance fees of up 20% a year. Management fees at 1-2% are also high compared to conventional funds, motivating hedge fund managers to work hard for their allocations.
According to UBS research, between January and August this year hedge funds made average returns of about 2-2.5% as volatility dwindled and range-bound markets took on a downward bias. In contrast, traditional funds would probably have seen the value of their equity stakes drop 5-6% over the same period.