One is born to take risks, suggests W.I. Thomas, a 20th-century American sociologist, who believes that man has an innate appetite for gambling. And an increasing number of people, both in the West and in emerging markets of the East, have now taken their gambling instincts to the stock market, says Robert J. Frey, former managing director at Renaissance Technologies Corp.

Frey came to this conclusion after an extensive visit to China during which he met with investors, banks and finance companies across the country. Renaissance Technologies Corp is one of the largest and most successful hedge funds the world over.

"I see a good many Chinese investors pursuing significant returns by investing in the stock or property market," says Frey, who sees the hunger of mainlanders for significant returns justified given that China has long been a hotbed of high-profile growth stories. Yet the downside is that of too much risk.

"Higher risk may generate higher returns in some cases, but mostly higher risk has nothing to do with higher returns," says Frey. He adds that the volatility and uncertainty of stock and property markets do not necessarily translate into good returns for investors.

Is there such a thing as a safer bet then?

Yes, there is, Frey would say. Simply put the money into the hands of hedge fund managers ready to diversify the risk by using a portfolio of strategies other than investing long in bonds, equities, or money markets.

The majority of hedge funds seek to hedge against the risk of loss, making consistency and stability of return their priority.

"People probably will cheer on the funds that deliver a one hundred percent gain, but that means a lot of risk has to be taken," says Frey, who considers a 10 to 15 percent gain good enough on a long-term basis.

"A fund manager's job is to preserve the wealth of their investors. In this regard, risk control means the same thing as making money," adds Frey.

Still, he doesn't buy the popular perception that fund managers aggravated the financial crisis in 2008.

"If we (fund managers) screw things up, we either lose money or go out of business. None of us receive the taxpayers' money as AIG, Goldman Sachs and Morgan Stanley did," Frey says.

On the contrary, Frey sees hedge funds playing a positive role during the financial turmoil by providing a tenable source of liquidity.

"The fund industry is a sound business. If some funds are doing badly, you have only the improper operation to blame. You can't spurn the industry altogether simply because someone in the industry is not faring well," Frey says.

A good fund manager, in the eyes of Frey, should be someone who is able to clean out the marginal performers in the portfolio.

That said, there is one more factor to consider when entrusting your money to a hedge fund manger, and it is probably the most important one: These guys share your pains of loss and joys of gain.

Unlike mutual fund managers who are paid by the volume of assets managed, hedge fund managers, besides a typical 2 percent management fee, are mainly paid by performance, which translates to a typical 20 percent of the profits delivered. In other words, it is for these wealth-keepers' own benefit to be shrewd enough to bring about positive returns regardless of market conditions.

But beware of hedge fund managers who are equally likely to take excessive risk for personal rewards. That was exactly what happened in the "good old days" of easy credit before the financial tsunami caught everybody unprepared in 2008.

China Daily

(HK Edition 08/19/2010 page3)