Global Investor: Barton Biggs; Don't Blame the Hedge Funds.(Viewpoint essay)

Byline: Barton Biggs is a managing partner of the Traxis Partners hedge fund in New York.

Hedge funds, like Moby Dick, are mysterious and potentially threatening, but are they the principal cause of the speculation and mad volatility in commodity prices we've seen in recent years? A lot of market watchers seem to think so, but I don't. Instead, my guess is that the culprit is more a case of what might be called "institutional envy" or, more precisely, "endowment envy."

During the late 1990s and the three-year bear market that ended in 2003, large, institutional portfolios--which were traditionally invested in stocks and bonds--suffered. They missed the huge gains in venture capital and private equity in the second half of the 1990s, bought into technology and In-ternet stocks just before they crashed, and were criticized for being unimaginative, stodgy and prone to debilitating committee-think.

At the same time, two new tribes of heroes were rising in the investment world--hedge funds and college endowments. In the devastation of the bear market, hedge funds prospered. For the five years that ended March 31, 2003, a hedge fund at the middle of the pack earned 7.8 percent a year, and one in the 75th percentile returned 12.7 percent. By contrast, the S&P 500 had a negative total return (including dividends) of 3.6 percent per year.

The other heroes were the endowments of major colleges such as Yale, Harvard and Stanford. Yale's endowment has grown 17 percent a year for something like 20 years now, and has transformed the economics of the university. Its chief investment officer, David Swensen, has become big money's Warren Buffett. All these schools emphasize absolute return strategies (hedge funds), private equity, venture capital and real assets (timberland, oil and gas, real estate, commodities). These asset classes are much less liquid than good old stocks and bonds, but they are good diversifiers--they don't go up and down with the stock market.

Licking their wounds, owners of big money--whether pension funds, endowments or wealthy families--began asking their investment managers why their performance was so lousy compared with Yale's or Harvard's. Their response was to pour money into the asset classes that the new heroes had ...