There's a lot of money floating around with nothing to do

Section:

If its owners had any sense, they'd buy something real, shiny, and yellow.

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Wall of Money Chasing Exotic Hedge Funds

By James Mackintosh
Financial Times, London
Saturday, May 12, 2007

http://www.ft.com/cms/s/fd330478-0024-11dc-8c98-000b5df10621.html

As hedge funds move into the mainstream, managers are testing demand for ever-more exotic investments -- and finding backers willing to stump up millions of dollars for funds putting cash into everything from football players, wine and art to aircraft leasing and carbon credits.

Some bizarre funds have attracted money in the past year, promising sponsors -- often big institutions such as pension funds -- that their returns will not move in line with shares, bonds, and other traditional investments.

"There is a wall of money chasing every opportunity in the alternative scene so you really want to be targeting new niches where you still have a scarcity of capital and inefficiencies that can be exploited," says Dan Gore, co-founder of Orthogonal Partners, which is launching a fund dedicated to investing in exotic hedge funds.

Those new niches are getting ever more obscure. A sectorial fund specialising in sugar is raising money, while art and wine funds are successfully raising millions of pounds.

But some of the once-exotic fringes of hedge funds are moving firmly into the acceptable middle ground for investors.

Hedge funds have become major backers of Hollywood through film finance, while portfolios of unpaid credit card debts have shot up in price thanks to the proliferation of funds investing in them and then hiring debt collection agencies to recover the money.

So many carbon credit trading desks have sprung up at hedge funds that Gordon Brown, chancellor, changed the tax rules this year to ease investments in the sector.

Banking, too, is being contested by a plethora of hedge funds moving into direct lending, with the most famous example being the loan given by Citadel, Perry Capital and Och-Ziff to Malcolm Glazer to buy Manchester United.

Still, many investment ideas remain odd, to say the least. A series of football funds have raised money to buy the rights to promising young players, betting that they can profit from transfer fees if the players are a success -- with investors having to assess risks such as injury or drug abuse, rather than the market falls or interest rate rises they are used to dealing with.

Tracy Pearson, head of alternatives at London fund of hedge funds Forsyth Partners, says it is questionable how many of the exotic funds are really hedged.

"If it is offshore and they can charge 2 [percent a year] and 20 [percent of profits], it is a hedge fund," she says. "We get all sorts of stuff, usually sent from a Yahoo e-mail account."

Forsyth, like other fund of funds, rejects most of the exotic appeals for money on the grounds that they are hard to value and illiquid.

Sabby Mionis, director of CM Advisers, a fund of hedge fund manager, says he will not invest in anything he does not understand. "We are financial people, we understand loans but we don't understand art," he says.

Peter Lunzer, director of the Wine Investment Fund, says: "In five years' time wine will come off the exotic list and be firmly on the low-risk, reasonable return list," he says.

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