Hedge funds which survive the 50 per cent cull of the industry should be back “above water” by the first quarter of 2010, and absolute return adviser Cliffwater is taking advantage of better terms to refresh and even grow the fund-of-fund portfolios it assembles for its large US institutional clients. Cliffwater’s CEO and chief investment officer, Stephen Nesbitt, and managing director Thomas Lynch, were visiting Australia last month to promote a research relationship they have struck with Asia-Pacific alternatives consultant, Sovereign Investment Research.

Nesbitt said the typical Cliffwater program contains about 20 hedge fund managers, with long/short managers currently about 30-40 per cent of the portfolio and event-driven managers speaking for another 15-20 per cent. The preference for long/short suited a backdrop of heightened market volatility and differentiation of performance between good and bad companies, while market dislocations lent themselves to the event-driven style.

Nesbitt said commentary on hedge funds had “overstated the negative”, and that investors had no right to have expected hedge funds would necessarily gain while markets fell. “GPs never felt comfortable saying they would never lose money.

The head of Och-Ziff said it best, he said our obligation is not to never lose money, but if we do we won’t lose you a lot… you have to remember that hedge funds did what they had to do in the sense of being the source of liquidity, so they had redemptions of 30 per cent, and they had to deal with it suddenly becoming illegal to short the biggest industry sector.”” Nesbitt predicted hedge funds would be back above their high watermarks by the first quarter of 2010, and observed that managers remained motivated to outperform, but also more willing to negotiate better fee terms.

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