From the March 2008 issue of Investment Advisor • Subscribe!

Zero-Sum Game

As existing hedge funds liquidate, there are always new products coming to market.

Morgan Stanley Investment Manage- ment recently announced the launch of Morgan Stanley Global Long/Short Fund, a closed-end fund of funds with a $100, 000 minimum investment. Registered under the Investment Company Act of 1940, it is the second registered fund of funds aimed at eligible individual investors seeking to gain access to the hedge fund market. An initial registration statement was filed last summer.

This fund, along with two other similar vehicles launched two years ago, is overseen by Mustafa Jama, who heads up--and serves as chief investment officer of-- Morgan Stanley Alternative Investment Partners' fund of hedge funds team. Alternative Investment Partners is the bank's fund of funds unit within the overall $109 billion alternative investment platform. It comprises funds of funds across all alternative asset classes, including hedge funds, private equity, and real estate.

The day-to-day lead portfolio manager is Kevin Kuntz. Three other portfolio managers--Jose Gonzalez-Heres, Mark van der Zwan, and Paresh Bhatt--will work with him.

The Global Long/Short Fund will invest in approximately 20 to 25 managers and is designed to generate long-term capital appreciation, with less volatility than the equity markets.

The initiative is part of a continued effort by Morgan Stanley to tap into the growing mass affluent market and to satisfy the demand of smaller institutions, such as family offices and endowments for smaller investment minimums. It is the third vehicle launched with a $100,000 minimum investment in 18 months.

In the summer of 2006, MSIM launched two similar funds of hedge funds with a multi-strategy focus. Called Absolute Return Fund and Absolute Return Fund STS, both funds consisted of one strategy seeking absolute return gains across a broad range of market environments. STS stands for "Special Tax Status." It was designed to reach tax-exempt and tax-deferred investors. Both vehicles now amount to $900 million in assets.

While those funds aimed at facilitating the reallocation of investors' assets away from fixed income, this new one will target more specifically equity allocations.

Morgan Stanley AIP currently manages 18 funds of hedge funds, including Diversified Low Volatility Funds, Diversified Funds, Opportunistic Funds, Strategy Specific Funds, and Enhanced Index Funds. The new Global Long/Short Fund fits into the Strategy Specific Fund program.

In other news, Knight Capital Group Inc. said in a regulatory filing it is liquidating a pair of poorly performing hedge funds, the U.S.-domiciled Deephaven Event Fund LLC and the Cayman Islands-domiciled Deephaven Event Fund, Ltd. It is returning the assets of these two funds--totaling $780 million--to the investors.

Knight said in the statement, filed with the SEC on January 31, that its asset management subsidiary, Deephaven Capital Management, LLC, concluded that the funds aren't viable "given the current macro-economic environment, performance over the past nine months, declining investor interest in event-driven investment strategies, and significant levels of redemption requests in the Event Funds."

Knight reported on January 16 that in the final quarter of 2007, Deephaven lost $426,000 pretax. This was especially disappointing because Deephaven had earned a profit of $27.4 million in the fourth quarter of 2006.

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