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Active Alternative Investments: Half of a Pair of

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BOSTON (–The Boston Consulting Group Inc. has looked into the future of global asset management and has reported on the Darwinian struggle it sees shaping up there–a bit like the two claws of a lobster, closing in on its prey.

A study released July 27, “Navigating the Maze, Global Asset Management 2003,” denies that a “doomsday scenario” lies ahead for the traditional active asset manager dealing in bonds and equities, but there is very little here that can really be reassuring to such folks. It portrays them as ever more tightly squeezed, in the years to come, between active alternative investment strategies, including those of hedge funds, on the one hand and passive strategies on the other.

The study predicts that investors will continue to be drawn increasingly to passive strategies, and this of course will put greater pressure on fund managers and others pursuing active strategies (whether traditional or alternative) to justify their fees.

Investors understand that few active managers outperform the market consistently and that index funds cost less. Furthermore, passively managed funds give investors a way to isolate market risk.

The Boston Consulting’s study finds that “exchange-traded funds and enhanced index funds appear poised for the strongest growth in the commodities segment.” At present, the top-five index fund players represent 85% of the global market. Consolidation might have to go somewhat further because fund size and low administrative costs are essential to success.

On the other hand, those investors who do have confidence that an active manager can earn its keep will look for strategies uncorrelated with the equities markets. Although the average hedge fund achieved very low return in 2002, (CSFB/Tremont* Hedge Fund Index finished the year up 3.04%.), that still compares quite favorably to the return on the Standard & Poor’s 500 stock index, which ended the year with a loss of 22%.

The report also observes that the vast majority of hedge fund investment (80%) continues to be managed in the United States.

“The key to success in alternative products is to put in place structures and processes that allow for strong reactivity and creativity. They can include focused training dedicated to alternative products, the development of highly specialized sales forces, and the use of external growth tools. Heavy attrition in the hedge fund sector is likely to continue, as poor performers will be weeded out,” the authors wrote.

*Tremont Capital Management Inc., Rye, N.Y., is a strategic partner of and a minority investor in HedgeWorld.

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