Amaranth was undoubtedly the big hedge fund story of 2006. Whilst some like to characterize it as having disappeared without causing a ripple, people did lose money in that fund. Thomas Della Casa, investment strategist of RMF, the core investment manager of Man Investments, spoke to Asian Investor about the hedge fund markets in 2006, his outlook for 2007, and Amaranth, one of the few investments that didnÆt work out so well for Man this year.

ôWe have to apologise to investors for putting money into Amaranth. It could happen again, because hedge funds are paid to take risks. Our portfolio was diversified but you could still feel the effect,ö says Della Casa. ôWe knew quite a bit about Amaranth. Our analysts went to see them six times this year. But by the time it started to get hot, it was too late, because of lock-ups.ö

Man is predicting rationalizations in the funds of hedge fund sector in 2007. It is their hunch that if a fund of hedge funds has assets under management of less than $10 billion, then it is operating below critical mass and could be gobbled up by a larger competitor.

ôThere have been huge inflows from institutions,ö says Della Casa. ôThey are calling for standards of reporting and client service at such a high level it demands a huge financial commitment, and smaller funds of hedge fund groups simply cannot afford it.ö

Man thinks that the outlook for Asian hedge fund strategies in 2007 is shadowed by the possibility of a harder landing for the US economy.

Even though some investments are currently standing at multi-year highs, volatility has been at low levels lately and Man thinks volatility is the cheapest asset class around: the uncertain economic outlook suggests that a return of volatility next year is a safe bet.

Man thinks a return of volatility will benefit convertible arbitrage strategies and opportunistic global macro managers. Mindful of a Morgan Stanley study that estimates private equity houses have $350 billion to spend (more if leveraged), Man also sees opportunities continuing for event-driven managers.

The period of 2006 that will endure longest in the memories of local hedge fund managers is the month of May. There was an unfortunate legacy to this month, as hedge fund managers reduced leverage and selectively cut positions, which left them under-invested when the reflexive bounce-back happened almost immediately afterwards. The long-only funds clung on to their positions and came out ahead.

That sounds like something of a double-whammy then. Thomas Della Casa explains it thusly: ôLong-only funds perform better in equity bull markets. Hedge funds are nearly always long-biased, so canÆt avoid losing money when markets fall, but they do offer some protection. You could call it æoptimised downsideÆ.ö