Hedge hunters rake in the profits: London has a new breed of fund manager in the Soros mould, writes Rupert Bruce

GEORGE SOROS, the New York hedge fund manager, may have been the one who attracted the headlines by breaking the pound but London has quietly been growing a hedge fund business all of its own.

Just like Mr Soros, these personality-led businesses are attracting large sums of money and making fortunes for their founders. And also like Mr Soros, these managers have a flair and originality that has set them apart. David Weill - perhaps the most successful UK hedge fund manager, is said to be deeply religious and runs a non-fee fund for charities.

Indeed, non-conformity explains much of the success of these managers. They have shunned the conventional investment manager's holy grail - beating the index that measures the average performance of the markets they invest in. Instead they try to achieve good absolute performance regardless of what direction the markets are moving in.

Last year was a good one for investment managers everywhere, with the exception of Japan. But Mr Weill stood out: he is understood to have made returns, measured in dollars, of about 100 per cent after fees for his clients. Similarly, Crispin Odey, of Odey Asset Management, has made more than 60 per cent in deutschmark terms for investors in his Odey European Fund Inc.

According to WM Company, the pension scheme performance specialist, UK pension funds made an average of almost 28 per cent, measured in sterling terms.

This is not strictly comparable because the dollar rose by 2.3 per cent against the pound during the year, while the deutschmark fell by 4.6 per cent.

Naturally, investors are flocking to participate. Both these hedge funds are only about a year old, yet Mr Weill is understood to have about dollars 1bn under management. Mr Odey presides over more than dollars 900m and has already closed his funds to new investment.

The managers have done very well for themselves too. Based on annual fees of 15 per cent of performance and 1 per cent of funds under management, the industry minimum, they would have made more than dollars 15m each last year. Mr Weill may have made much more.

This was over a year in which they both started with little more than dollars 100m under management. So with a much higher starting point this year, they could be looking at significantly greater profits.

Richard Atkinson is deputy managing director of IFM, a smaller hedge fund manager with about dollars 500m under management that was formed as early as 1984.

He said: 'The leverage on success is enormous here. If you have a 30 per cent year return with dollars 750m under management, you can generate dollars 225m of revenues. If you then take 20 per cent of that as your profit share, you will make dollars 45m. You may have expenses and those could be between dollars 5m and dollars 10m a year, which would leave you with dollars 35m of pre-tax profit.'

Hedge funds, like so many financial instruments, hail from the US. They have been around since the 1970s across the Atlantic, and the star managers - George Soros, Michael Steinhardt and Julian Robertson - are almost household names.

But in the past year or so, the funds have blossomed. A recent edition of Barron's, the US finance weekly, said there were more than 800 hedge funds representing dollars 35bn to dollars 40bn. Of that, around dollars 15bn is run by Messrs Soros, Steinhardt and Robertson.

Hedge funds are far from a homogeneous group. The term was originally used to describe funds that could hold 'short' as well as 'long' positions. A short position is one where the manager sells a security or commodity that he does not actually own. If the underlying investment falls in price, the manager will make a profit. With a 'long' position, managers buy securities as normal and make a profit if the price rises.

Because they can take both positions, hedge funds are not reliant on the upward movement of the market to make money. This is why they can afford to ignore the investment conventions.

However, funds may also use derivative instruments - derivatives allow managers to make large investments without significant outlay.

They can also make unconventional investments. Mr Soros, for example, is negotiating for a stake in Italy's heavily indebted Ciga hotel group. This would be held by his flagship Quantum Fund.

IFM was the first of Britain's hedge fund managers, founded in 1984 by David Craig and Mr Atkinson, both from the US investment bank JP Morgan. It was followed by Buchanan Partners, founded by Peregrine Moncrieff in 1990.

The other well-known London hedge fund managers are Michael Sofaer of Arral & Partners and, of course, Mr Odey and Mr Weill. But many others are rumoured to be starting up.

The investment styles employed by these managers vary enormously. The simplest is that of Mr Odey. His strength is as a European stock picker.

IFM, on the other hand, has five or six different strategies varying from investments in special situations, like corporate restructurings, bids and deals, to fixed income strategies and so on. Investments chosen through these strategies are placed together in a fund with the aim of beating pension fund performance in terms of higher returns and lower volatility.

Mr Moncrieff believes the superior risk/reward trade-off offered by many hedge funds is one of the reasons for their proliferation.

'One of the things that has really helped hedge fund growth in general has been the decline in bond rates and interest rates, which has meant that people are looking at high levels of return that are not too volatile,' he said.

'Straight equities are quite volatile and so a true hedge fund approach can be less risky.'

But hedge funds have been operating in favourable markets. Clive Gibson, a director of St James's Place Capital Group, said: 'So many markets went up in 1993 that, basically, everyone did pretty well. And if you had any gearing (leverage) at all, you suddenly went up 50 per cent.'

The chances are that last year's performance and growth in the business were exceptional. Yet hedge funds should continue to grow in number and size. They should also continue to beat their more conventional rivals and their managers will be rewarded accordingly.

(Photograph omitted)