Ask hedge fund managers about their chief concern, heading into the new year, and most will say the same thing: market volatility or, more accurately, a lack thereof.
It's the same concern hedge fund and hedge fund-of-funds managers had during most of last year. The lack of volatility — the life-blood of most hedge fund strategies — was evidenced by a market that stubbornly traded within a 100-point range (judged by the S&P 500 index) for at least half of 2004. The lack of opportunity resulted in sluggish performance for most hedge fund strategies.
"For much of last year, basically April to September, the market was extremely range-bound. Whole rafts of hedge fund managers had a hard time making money," said Kent Clark, managing director and chief investment officer at Goldman Sachs Hedge Fund Strategies, the New York-based hedge fund of funds.
"In 2004, everything went into slow motion except oil prices. It made an unprecedented number of hedge fund strategies look very bad," said Charles G. McNally, managing director and chief investment officer of hedge fund of funds Lyster Watson & Co. LLC, New York. "You need capital to move to create market dislocations that will create inefficiencies," which hedge fund managers exploit as part of their investment strategies, said Mr. McNally.