The outlook for the economy is good, but the outlook for hedge funds is not so good.[@@]
Robert Manning, chief executive officer of Massachusetts Financial Services, Boston, gave that assessment during an annual investment review.
“Hedge funds are an industry disaster waiting to happen,” Manning said
There is too much money chasing too few hedge funds, and the cost of investing in hedge funds is steep when compared with the cost of investing in mutual funds, Manning argued.
Because most retail investors buy hedge funds through funds of funds, the retail investors pay both a hedge fund fee and a fund fee, and the fees can eat up more than 30% of a portfolio’s profits, Manning said.
Manning’s company, MFS, is a unit of Sun Life Financial Inc., Toronto.
Hedge funds are investment funds aimed at sophisticated investors. Because they are exempt from some of the government restrictions imposed on ordinary mutual funds, they can use investment tools such as short-selling, leverage and derivatives. Some hedge funds are designed to perform better when markets turn down.
The hedge fund industry manages about $875 billion in assets and is growing about 20% per year, according to the Hedge Fund Association, Aventura, Fla.
Some other MFS executive comments:
- James Swanson, MFS chief investment strategist: The U.S. economy is “very resilient,” and a “steady, slow increase in demand and lean balance sheets and cost structures” will lead to inflation-adjusted expansion of about 3%. Swanson likes large-cap U.S. stocks, value stocks, China and Continental Europe.
In the United States, “value is still in the driver’s seat,” Swanson said. He also suggested that “the story of China is the story of a lifetime,” and he predicted a growth rate of at least 2% for “European zone” countries other than the United Kingdom. But he said he is less optimistic about the United Kingdom because U.K. debt levels are similar to those in the United States.
- Thomas Melendez, an MFS portfolio manager: Institutional investors put between 18% to 20% of their assets in international stock, but individual U.S. investors put only 3% of their 401(k) assets in international stocks, even though U.S. consumers buy many “world brand” products. “There is a disconnect as to what we buy as consumers and what we buy as investors,” Melendez said.
The gap may be due partly to memories of past weakness in international investments, but it may be due partly to U.S. investor comfort levels, Melendez said. He pointed out that only 18% of U.S. residents have passports.
- Michael Roberge, MFS chief fixed income officer: Roberge looks for fixed-income securities of companies that are trying to reduce leverage on their balance sheets.