Greylock, which jumped into Asia in 1997 and Russia in 1998, took an investment position in the Middle East in late 2009 and now has about 20% of its assets there. "The absolute returns are very good, there's not a lot of competition and it trades in its own world, insulated from the macro moves in other markets," he says.
Humes sees no shortage of opportunities. "Our universe is exploding," he says, noting that roughly $600 billion in high-yield debt was issued in emerging markets in 2011, up from $344 billion in 2008. He also expects to see a lot more workouts on the distressed side.
Greylock doesn't use any leverage and it works with people on the ground, such as government officials, financial institutions and industry experts. "You don't want to do it alone in the Middle East and Greece," says Humes, who's on a steering committee involved with the Greek debt negotiations.
Boston-based IBS Capital LLC, meanwhile, pursues an event-driven strategy with focuses on distressed debt and turnaround stocks. "It looks like vulture investing, but the reality is guys like me are digging around trying to find the diamond in the rough," says David Taft, president. When investing in Russian natural gas company Gazprom in the late 1990s, he saw the possibility for rebounding oil and gas prices, a macroeconomic turnaround in Russia, and a corporate reorganization and management overhaul-all of which happened between 1999 and 2006.
Taft, who doesn't use leverage, prefers a concentrated position and typically holds investments two to five years or longer. He currently has about 15 positions, mostly in the U.S. He feels wealthy investors who don't plan to spend their money soon are better off taking a longer-term mindset and not getting hung up on liquidity and diversification. He's seen family offices with 50 hedge funds. "If you don't know what you own, that can get you into trouble," he says.
Martin Friedman and Andrew Jose, co-founders of McLean, Va.-based FJ Capital Management LLC, spent a combined 40-plus years in the banking industry before launching the FJ Capital Long/Short Equity Fund in January 2008. The fund, which has a long bias, invests in the publicly traded stocks of U.S. community banks with market capitalizations of $1 billion or less.
"Community banks are eating the lunch of larger banks," says Friedman. Meanwhile, the fund's average portfolio holding is trading at just 70% of tangible book value, versus the 2 to 2.5 times the sector traded at four to five years ago. He and Jose expect to see more consolidation among its roughly 1,100 remaining banks. Their fund mostly targets banks that are building franchises through mergers and acquisitions. "The takeout is the icing on the cake, not the focus," says Jose.
Other niches discussed at the hedge fund conference included global convertible bonds, mortgage-backed securities, health care and technology.
Advisor Outlook
Jordan Heller, president of Heller Wealth Advisors, a fee-only firm with offices in Roseland, N.J., and New York City, is pleased by the expansion of the hedge fund industry. "When I first entered the wealth management business in 2000, I was immediately drawn to them and the selection has only grown," he says.
The former institutional research analyst says he's attracted to hedge funds' risk-reward dynamics. About 20% to 40% of his typical client's investment portfolio is in alternative investments, including hedge funds. Without them, he says he would've had much more volatility in the past four years.