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HEDGE FUNDS SHIFT INTO NEUTRAL

Worried about the market? Try a ''long-short'' fund

It's late afternoon on Dec. 9, two trading days after Federal Reserve Boardx Chairman Alan Greenspan's cautionary musings on Wall Street's bull market caused stocks around the world to tumble. Then, in a surge before the closing bell, the Dow Jones industrial average shoots up more than 80 points. How come? ''I have no idea,'' says hedge fund manager Christopher E. Dean. Nor, he professes, does he care.

Dean, who runs the Vector Partners LP fund from suburban New City, N.Y., is among a hardy cadre of investors who strive to make money regardless of which way the stock market moves. Unlike ''macro'' fund managers who garner headlines by betting billions on a single market or industry, they prefer to take the term ''hedge'' at its word. They hew to an unglamorous method of simultaneously buying and selling short stocks, bonds, or other instruments. Their object: to turn modest profits, say, Treasury-bill yields plus a few points, with very low volatility.

This strategy has tended to throw off cash even in bear markets. As a result, these funds--called ''market-neutral,'' ''long-short,'' or ''nondirectional''--have become the investment du jour for anyone looking for insurance against the fizz on Wall Street going flat. ''We're seeing concerns about the toppiness of the U.S. market,'' says Nicola Meaden, director of London-based hedge fund consultant TASS Management Ltd. ''So an increasing amount of money is moving into nondirectional funds.''

Although some offshore hedge funds welcome any investors except for those residing in the U.S., American-based funds are strictly for the multimillionare set. Right now, ''neutral'' is their pet buzzword. Indeed, one top investment firm, New York-based WPG-Hennessee Hedge Fund Advisory Group, is urging its wealthy clients to allocate a third of their hedge fund assets to market-neutral managers. For good reason. Evaluation Associates Capital Markets Inc., a Norwalk (Conn.) investment firm, figures market-neutral equity funds have returned about 12% this year. Says manager Dean, whose fund is up 14%: ''The nervous, smart money seems to be looking this way.''

Market-neutral managers claim they can build portfolios that have a very low correlation to movements in the Standard & Poor's 500-stock index. If everything goes right, that should allow the funds to shrug off market declines. But the funds haven't entirely escaped the shadow of 1994: Two supposedly market-neutral investors in mortgage-backed debt, Granite Partners and Granite Capital, collapsed when the bond market imploded and their hedges fell apart. Investors were left with an estimated $400 million in losses.

HITTING SINGLES. Market-neutral managers specializing in equities insist they are following a far more conservative approach than the one that led Granite astray. Many risk arbitrageurs, for example, play the merger game by shorting the shares of an acquiring company and purchasing those of its partner. The idea is to profit from small fluctuations in the companies' share prices between a deal's announcement and its closing. In 1996, the arbs have been turning in annualized returns averaging 14%. Funds that use large amounts of leverage can multiply such returns.

Few market-neutral managers have been able to match the showing of the better macromanagers, such as Julian H. Robertson Jr., whose Tiger Fund is up some 40% in 1996. Investors in the fund say Robertson bet correctly that Japanese financial stocks would be blown away this year and also made a bundle on the rise and fall of copper. But going for home runs doesn't appeal to the market-neutral crowd. These folks say they'll be happy consistently hitting singles, no matter which way the market goes.

By William Glasgall in New York



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