For the first time ever – probably – all the major hedge funds of the world are open to new money. But some are so short of cash that they may have to pay out distributions in kind rather than cash.

These are the views of Richard Elden, the godfather of the hedge funds of funds industry, recently born again as an activist fund-of-funds manager. Elden was speaking last month on a visit to Australia to support his recently appointed Australian representative, NWQ Capital Management.

The founder of the Grosvenor hedge fund of funds business, which is BT’s international hedge fund partner, said that most hedge fund contracts allowed them to pay out assets rather than cash to investors if necessary. He said that it was possible that this would occur due to the credit crisis and that some of those distributions might even be of illiquid assets. “At least, for the first time, all of them are open,” he said.

Elden, who was a key early supporter of Carl Icahn’s activist fund, launched his new business – the first of its kind – in June 2006. It has just under US$500 million under management, invested through 11 managers in the US and Europe. Named Lakeview Investment Managers and based in Chicago, it covers a universe of about 120 activist fund managers and culls this down to about 30 from which it selects its final line-up.

Elden said the firm was about to add a twelfth manager from November and then another two sometime after that. “You need that sort of diversification … because most activist managers are long-only or long-biased very concentrated funds. They might have up to 30-40 per cent of their portfolio in one stock.”

Lakeview diversifies geographically and according to market cap of the managers’ strategies as well as across the two main styles of activism – operational, which tends to focus on a company’s income and costs, and structural or transactional, which tends to focus on a company’s balance sheet and fostering M&A activity.

Jonathan Horton, the managing partner of NWQ, said that most activist managers were targeting earnings of about 1.5 or two times the share market’s normalised returns. This implies an outperformance of about 10 per cent.

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