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Barton Biggs: Short Selling and Other Strategies Overcrowded

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NEW YORK (–There are sector bubbles in hedge funds, said Barton Biggs, speaking at the endowment management forum of the National Association of College and University Business Officers.

Mr. Biggs, who manages the US$2 billion global macro fund Traxis Partners LLC and was previously Morgan Stanley’s chief investment officer, is the man who introduced the notion of a hedge fund bubble to the public. He warned of one in June 2001, when he was still at Morgan Stanley.

In 2003, after he left the bank and launched Traxis, he downplayed the hazard, arguing that asset inflows had slowed and many weak funds already had disappeared. Now he sounds concerned about specific strategies and markets rather than the entire industry.

One example he gave was convertible bond arbitrage, where high returns attracted a lot of money and new hedge funds. Think of the alpha in a sector as a pool, suggested Mr. Biggs. With more horses drinking from the pool, returns go down.

In his view, this can happen in any sector and his own corner, global macro, also is suffering from excessive activity. Too many people are doing macro and because of that, “moves that served us well in the past did badly last year,” he said. Losses at Traxis, partly caused by a wrong bet on oil, hit the news in 2004.

In the long/short equity sector, he sees short selling as too busy. “The short side is so crowded that non-fundamental factors cause big moves,” he said.


Not that he’s against hedge fund investments–he told the gathered school endowment officers that if he were in their place, he’s allocate 10% of assets to absolute return strategies, to get 12% to 13% returns. He favors a diversified portfolio of hedge funds, where the volatilities offset each other.

His forecast on private equity, venture capital and high-yield bonds is a lot darker than his take on hedge funds. Buyout funds are saddling companies with more debt and selling junk bonds to pay themselves, while the junk bond market is so vulnerable that it is best not to allocate anything to it, he said.

But in most of his talk, he sought to temper the current conventional wisdom that overall returns will be low. He argued that the declining dollar will cure the U.S. trade deficit and encourage Asians to consume more.

His likely scenario: The weaker dollar will be a bullish factor for the world and the U.S. economy will slow down but not go into recession. It’s a Goldilocks environment, not a boom but not a bust, he said.

Mr. Biggs has a mixed record with predictions–he was dead on the mark in calling the technology bubble’s 2000 burst but premature in predicting the end of the bull market in 1998.

Contact Bob Keane with questions or comments at: [email protected].


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