Not all hedge funds managers are created equal, and investors need to be cautious about who they give their money too.
That's the message from London-based David Smith who is the chief investment director of the GAM Multi Manager group.
He says with the proliferation of hedge funds in the past year to 18 months people need to be cautious when selecting managers.
"Quality is being replaced by quantity," he says. "And quantity is being supplied by some relatively inexperienced (managers) in the hedge fund world."
He says new managers have an increased, or added risk.
"There's many new entrants which have good one, two or even sometimes three year track records, but (they) have been managing less than US$10 or 15 million and all of a sudden they are going to have hundreds of millions of dollars at their disposal."
Smith says investors should seek out managers with long track records. They should also find out how much money they have been managing (and for how long), and they need to seek reassurance that a fund has adequate liquidity.
"I think caution is to be definitely encouraged because quality is definitely falling."
While Smith sounds a note of caution, he isn't trying to put people off hedge funds. He says there are talented investment managers out there, you just have to look harder to find them.
Smith, who managers money for Tower's GAM Multi-Trading fund, says there are good opportunities for managers in the global macro style of investing. (This is where managers try to make money based on predicting which way economies or asset classes such as fixed interest or currency, are heading).
"Global macro strategies offer some great opportunites in the next 6-12 months."
He says the market volatility which has been around for two years is likely to continue for another six years.
This volatility and market dislocations are good conditions for global macro traders.
Smith is less keen on the more popular long/short strategies.
"The outlook for them is a little bit more difficult," he says.
The key problem managers have is executing short-selling strategies. Smith says managers are identifying good stocks to short sell on fundamental research, however "pure momentum is driving them out as those stocks rally."
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