Rate rises see hedge funds hurt

HEDGE funds have become so fashionable in the investment world that it's highly likely at least part of your pension pot will be invested in one. Billionaire George Soros put them on the map in 1992 when his fund helped drive sterling out of Europe's Exchange Rate Mechanism, making him a fortune in the process.

Thanks largely to their aggressive trading strategies, which can make money even when markets are falling, they made an absolute mint during the raging three-year bear market between 2000 and 2003, but are now finding it more of a struggle.

They need strong directional markets and low interest rates to prosper, but since November the UK market has seen stability and a big hike in interest rates. Man Group, the world's largest hedge fund run by chief executive Stanley Fink who earned £6.7m last year, is certainly finding the going much tougher.

Down from an April peak of 1,856p, it plummeted 94p further to 1272p after revealing that its key flagship fund, AHL diversified futures, saw its net asset value fall 4% to $20.48 compared to the previous week. Analysts reckon 10 out of its 11 funds have declined in the first half of 2004.

Exerting more downward pressure was growing market gossip that hedge funds have been hit by Banco Santander's £8bn-plus bid for Abbey National (5 1/2p better at 572 1/2p) and the strong rally in drug giants AstraZeneca (8p dearer at 2,428p) and Glaxo-SmithKline (11p up at 1,099p). They have been huge short sellers of the bank and drugs sectors in recent months.

Aim-quoted hedge fund RAB Capital crashed to 29 1/2p before closing 5 1/2p down at 31p after reporting a weak second- quarter fund performance. But RAB was still able to win new funds at a rapid pace and interim pretax profits soared 393% to £2.1m on turnover up 138% to £5.5m.

Helped by good figures from banking giant HBOS (19p higher at 694p) and oil group BG (11 3/4p up at 341p) the Footsie firmed 31.3 points to 4,356.2. It closed 15 points below the best because Wall Street fell 80 points at the outset following a surprisingly weak US durable goods report.

Dealers in New York also fretted about a strong oil price, which breached the $43-a-barrel level after bailiffs ordered Russian energy giant Yukos to stop sales. It revived fears that economic growth will slow.

Cruise ship group Carnival steamed 98p ahead to 2628p after sector peer Royal Caribbean docked with better-than-expected second-quarter earnings of $122.2m, up from $55.7m.

Floated on Aim at 30p on Monday, Cozart stormed a further 4p ahead to 54 1/2p. The company, which has devised an on-the-spot test to detect drug abuse - including heroin, cocaine and crack cocaine - from a simple saliva sample, has been awarded an extension to a Home Office contract.

Freight container maker Aerobox jumped 5 1/4p to 23 3/4p and in-flight marketing group Watermark advanced 17p to 143 1/2p after reaching an amicable settlement to a row which was heading for the High Court.

The dispute centred on Aerobox's termination of the companies' joint venture agreement in May, with Watermark claiming reimbursement for money it had spent to promote Aerobox's containers.

Under terms of the settlement, Watermark will take a 7% stake in Aerobox and will be paid an agreed marketing charge by it. In return, Aerobox will receive commission on sales to four airlines for six months.

Continuing hopes of strong recovery in the US plant-hire market left Ashtead up 1 1/2p more at 45 3/4p.

A website recommendation helped financial PR firm Hansard jump 13p more to a peak 107 1/2p. It has soared from 22p in just over a week following news that former City whizzkid and racehorse owner Terry Ramsden has taken a 22% stake in a £11m placing. Next on the agenda is the acquisition of a rival PR firm and Ramsden's own company, Griffin Leisure, which has property interests in Barbados.