(James Saft is a Reuters columnist. The opinions expressed are his own)

With just a few short weeks until the end of the year, look for many fund managers to take on more risk in an effort to salvage their annual return figures.

This is not about fundamentals, this is about something far more important: career risk.

Hedge Fund Research's Global Hedge Fund index, which is broadly representative of the industry, is up just 11.9 percent year to date, while its Equity Hedge index is scarcely doing better, up 12.6 percent. The HFR Macro Fund index is actually down 8 percent, indicating the best paid minds in the business did not see the astounding emerging markets rally and dollar fall coming.

Given that global emerging markets are up something on the order of 60 percent this year, that all global shares are up 30 percent and even the S&P 500 is up 22 percent, we can conclude that a lot of managers are heading into the year-end reporting season with a lot of ground to make up.

There are also lifeboats full of institutional fund managers and mutual fund managers in the same position.

What all who have missed the rally have in common is not a common failure of analysis -- there are lots of different ways to get it wrong -- but a collective vulnerability to finding themselves waving their clients goodbye. Letters detailing 2009 performance will have to be posted, ranking lists of funds will be published and there will be consequences.

It must be hugely tempting for managers who are behind -- and remember a lot of these people are not committed bears -- to pile in and hope the momentum trade can bring their returns back to respectability.

It all adds up to a supportive background for risky assets through the new year. There can be no assurances that fundamentals, which are pretty poor, won't reassert themselves. There is no telling too that policy makers might put a foot wrong and scare the markets, though I doubt it. They have a very large interest in a merry year end. Even if they didn't, inflation is not an issue and unemployment is, so don't look for any telegraphs from Washington, London or Frankfurt bearing tidings of rising rates.

COME BACK CHUCK PRINCE, ALL IS FORGIVEN
Individual investors who missed the rally are less likely to pile in right now. Their temptation will be to pass over the business headlines and go straight to sports. And besides, the holidays provide distractions of their own and you are highly unlikely to be fired by yourself as your own investment manager, now matter how richly you deserve the boot.

Professionals however are usually not so lucky as to be related to the client.

Of course, there must be many managers who are ahead of the market. Why won't they trim their sails and protect their gains? I don't know the answer to that but in my experience it just doesn't work that way. People tend to think of gifts as entitlements and it's a rare, and valuable, manager who having been aggressive when most were timid now gives up the habits of a lifetime.

It is all very reminiscent of good old Charles Prince, the former Citigroup chief who said about the leveraged buyout market, "As long as the music is playing, you've got to get up and dance," just as the world began to unravel. Prince wasn't a fool, he was expressing a core truth. If you are head of a bank or a mutual fund and you sit out a boom which you see as too risky you are taking on another, perhaps more persuasive risk; that the very clients you seek to protect will call you a stick-in-the-mud and take their business elsewhere.

This is not a specious argument about "cash on the sidelines" or money market funds. Numbers showing huge cash in money market funds are misleading; most of it will never end up in equity markets. This is simply about the self-fulfilling psychology and mechanics of rallies, especially rallies with official support.

The authorities, in their wisdom, have broken the circuit of a crash by flooding the market with enough money to drive up asset prices. This is intended to bring money out from under mattresses and force people to take risks again, to make them dance even if they feel like a fool.

That is unlikely to last forever or to work forever, but a reversal is less likely before January 1 than after.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

(Editing by James Dalgleish)

I've been building up a couple of dummy funds on Reuters' new Portfolio tool. Not only is it a welcome diversion from actual work, but it allows me to test the mettle of the fund managers we speak to, and check out the guidance offered by the Lipper Leader fund rankings.

One of my portfolios uses the stock picks and short ideas offered up by the managers we interview for the many FUND VIEW stories which dot the Reuters wire. The other simply picks some of the funds which score highest across the Lipper fund sectors.

In theory, it gives me ample room to lay blame elsewhere when the dummy funds inevitably go belly up and I'm forced into a fire sale of assets to repay my dummy investors with dummy money. In truth though, I'm going to set the asset weightings and decide when to buy and sell so any abject failures will be more fairly laid at my door.

The early results, in fact, are pretty encouraging.

The Fund Viewer stock picking portfolio has delivered me a comforting 8 percent return since I put it up on Sept 25 (my wedding anniversary -- must be a good omen) and that's with a ridiculously cautious 36-percent weighting in cash, as well as some equally ridiculous single-stock exposures caused by misreading the denominations. (That little 'p' is pence folks, big 'P' is pounds)

My Fund Leaders fund of funds has even less of a track record, but has still managed close to 2 percent returns since Oct 6.

Both funds are outperforming the FTSE Europtop 100 index, my chosen benchmark, by more than 18 percent on a three-month view. I've not exactly been scientific about choosing the index, but fortunately my dummy investors have notoriously poor due diligence standards.

Get on to the portfolio page, see if you show up my performance record as a painful underachievement, and try to top the Reuters Portfolio league.

Doubtless the FSA would like me to point out that the value of investments can go down as well as up. Mind you, anyone not conversant with that little peccadillo of the markets has either been asleep for the last year and a half or houses a memory so short-term they may well have forgotten the first half of this paragraph anyway.

- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

Before the credit crunch, we had what I called a Prozac market. Investors on both sides of the Atlantic seemed to be in denial, as irrational as the people who end up in the bankruptcy court because for years they have kept on smiling while the bills piled up unopened.

Last Fall, reality caught up in the shape of the worst banking crisis in history, and we have now had to mortgage our earnings for decades to come in order to bail out the banks. Not surprisingly, by mid-March this year, the Dow had fallen by well over 50 percent from its peak level at the start of October 2007, and the FTSE by nearly as much. In the last three months, however, the FTSE has risen by 20 percent and the Dow by nearly 30 percent. What has happened to justify the recovery?

The best that can be said is that there have been signs that the economic situation is deteriorating more slowly than in the second half of last year.

For example, the fall in house prices may be slowing. But in both UK and the U.S., they remain a long way above their long run levels by most yardsticks. Moreover, in the early 1990s, after the last British house price bubble popped, it took almost a decade for prices to recover, against a background of far higher inflation and a much more robust economy than today – and of course without an accompanying banking collapse.

Insofar as the construction industry is concerned, any increase in demand from the residential sector is likely to be overshadowed by continuing weakness in commercial real estate and, in the UK particularly, brutal cuts in public sector capital expenditure.

For the foreseeable future, the UK and U.S. governments, households and much of the corporate sector will be forced by record levels of debt to rein in their spending. Long term bond yields are already above 4 percent. Insuring against the risk of default costs 39 basis points for U.S. government debt, 80 points for UK gilts, and 300 or 400 points for a number of major multinationals, which clearly indicates that some financial markets have few illusions about the future.

Pricing equities usually involves a comparison of historic dividend yields with long term interest rates. Unfortunately, in crisis conditions, past levels of earnings (and hence of dividends) are no guide to the future. As government and consumers begin to repay their debts, they will both have to cut spending, or at least prevent it growing at anything like the rate seen in the last few years.

Ideally, the slack would be taken up by export demand. But with world trade in the doldrums, it is hard to imagine the UK and U.S. can export their way out of recession.

I can only visualise two possible exits from this impasse. Either the future involves years of Japan-style deflation, high unemployment and stagnant output. More likely, Anglo-Saxon electorates will opt for monetary expansion, inflation and devaluation, implying a de facto default – which is exactly the outcome being priced by the CDS insurance premia mentioned earlier.

Neither scenario is attractive for equity markets. Add to all this the danger of another round in the banking crisis (possibly involving the European banks), thinly-veiled threats from China to dump their dollars, long term problems which have not gone away, like global warming, pensions and health care……if the market was on Prozac last time, it must be on Ecstasy now.

So what should investors do? My own choice would be a mix of two components:

1. Corporate debt and/or equity of low-leverage companies in “safe” industries: pharmaceuticals and healthcare, food processors, utilities, etc.

2. Conventional and index-linked gilts in pounds, dollars and euros.

Of course, if you think governments are going to default on their debts, rather than inflate them away over the next decade or two, you need to buy gold……and a gun might be useful too.

– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Apparently, investors in Man Group’s flagship fund value liquidity and safety above performance. At least Peter Clarke, the company’s chief executive, hopes so.

He needs them to do so because, over the last five months, the investors in AHL, Man’s “black box” quantitative fund, have been suffering. Unlike many rival funds, Man did not “gate” its funds during the market panic, and Clarke believes that investors will remember this and reward Man for it.

Clarke says that the punters, who account for the bulk of Man’s $44 billion of funds under management, bought $2.6 billion of Man’s funds since the end of March, but the institutions are still running for the exit.

Moreover, private investors are switching out of guaranteed products, which put a floor under investors’ losses and which generate a higher margin for Man, into lower-yielding open-ended funds. Moreover, institutional investors are continuing to withdraw their money.

Man maintains that they are taking cash out because they can — other funds remain locked up-and that the trend will moderate soon. As Clarke put it, investors are looking for more exposure to the market.

However, quantitative, “black box” funds, like AHL or the famed Renaissance Technologies in the U.S., which follow market trends, are designed to do well whatever the market does. Perversely, this means they often do badly when the market does well.

AHL did well last year, generating a return of 33 percent when world stocks fell almost 40 percent. However, it completely missed out on the recent rally.

As Man admits, it does cope well when the market whipsaws. Man is investing in a new Oxford research centre. However, any new algorithm is unlikely to come fast enough to address the collapse in its assets under management.

This has had a catastrophic effect on both performance and management fees, driving a 40 percent fall in profit last year. Clarke says that he sees no pressure on the 4 percent-plus annual fee that Man charges its private customers.

He has, however, detected a demand for transparency. Once investors see how much they are paying for Man’s products — especially when they are not performing — they will continue to put their money elsewhere.

(Edited by David Evans)