By Tom Bradley

"The lower-hanging fruit is largely gone...but the return profiles are still attractive, relative to the extremely low cost of funding."

This innocuous quote from Peter Schoenfeld is very telling. In an article about the outlook for hedge fund strategies in 2010 in Barron’s magazine this weekend, Mr. Schoenfeld, who is the CEO of P. Schoenfeld Asset Management, and other managers make the point that the opportunities for super returns have all but disappeared. Valuations are more normal now compared to a year ago. Most asset managers I talk to, including our own, feel the same way.

The interesting part of the quote is the last eight words, “relative to the extremely low cost of funding.” The reason we are counseling clients towards caution right now is because asset values in the capital and real estate markets are being driven by artificially low interest rates. The prices on all types of securities are being pushed up by the lack of return from risk-free government bonds.

I don’t think valuations in the corporate bond and equity markets are unreasonable, but we nonetheless have to be careful doing our usual comparisons to government bond yields. There is nothing usual about those yields.