| Hedge fund industry players send confusing signals, investors holding fast |
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| 23/01/2005 | |
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Where is the hedge fund industry heading? While the hedge funds have conquered the hearts and minds of a large swath of the asset management industry and the institutional investment community, critical voices are finally being heard. The chief executive of Standard Life Investments, Keith Skeoch, dismissed hedge funds as a mere fad while cautioning investors about their high "death rate". More than enough for Standard Life Investments, one of the largest asset manager in the UK, not to enlarge its product line to hedge funds. According to Keith Skeoch, even if hedge funds have performed well in falling markets, they are unlikely to replicate the same kind of performance in growing markets, as opportunities for arbitrage wither away. Industry moving According to a report by Greenwich Associates, a US-based research firm, several trends suggest that hedge funds are moving out of the real of the "alternative" and into the mainstream – and this could have a deep impact on the returns that have been characteristic of this asset class up to now, as seen by SLI's Keith Skeoch. Greenwich Research shows that over a quarter of large institutional investors in the US, Japan and continental Europe use hedge funds, with an average investment of 1% of their total assets. Among European institutions, the proportion of hedge fund investors stood at 32% in 2004, from 23% a year earlier. In comparison, US investors were respectively 28% and 23% to include hedge funds in their portfolio. In turn, the research firm says that it is "unlikely that hedge funds as a broad-based industry of hundred billions of dollars will be able to replicate the robust returns generated by a relatively small number of funds in recent years." The research firm also points to deep structural changes in the hedge fund industry. Hedge funds are not anymore the small, totally unregulated and unregistered boutiques that they were at first. Many mainstream asset managers have added hedge funds to their line of products and a regulatory framework has been developed in many countries, which will lead to higher compliance costs for hedge funds, potentially weeding out the smaller and weaker funds. If the opportunities for late comers to the industry may seem a little less exhilarating than for longer established funds, it has not stopped the hedge fund industry from growing at a fast pace in 2004. According to the Hennessee Group, The New York-based investment consultant, 1,050 hedge fund management firms were created in 2004, up 15% to 8,050. This puts the size of the hedge fund industry at $934 billion in assets under management, up 17% in 2004. The broad-based Hennesse Hedge Fund Index added 8.27% in 2004. Although the three first quarters of 2004 were disappointing, the fourth quarter helped to conclude the year positively. "Although their initial appeal might have been the promise of home-run returns," says Greenwich Associates consultant Chris McNickle, "hedge funds are maturing into a mainstream institutional investment product or asset-class, and a cadre of firmly established hedge fund managers has the potential to evolve into something of a second-generation asset-management industry." A useful gadget Such a picture is likely to leave Merrill Lynch unfazed. In fact, the investment firm just love hedge funds – as teenagers furiously clinching to their newly bought iPods. "To shift analogies, hedge funds are a bit like iPods", says the investment firm. "They have a fashion/design/cool component, but their real appeal, we reckon, is that they actually do something useful, albeit at some cost." In a research note, the investment firm shares optimistic thoughts on hedge fund prospects in 2005, which should share the market gains in what is likely to be a "rosy" year for the asset management industry. "We believe that the performance characteristics which the alternative industry has displayed in the past fills a clear need for investors seek to match long-term liabilities", says Merrill Lynch. This is a structural shift there to last according to the investment firm. "Our belief is that the alternative industry is likely to prosper because portfolios are at present sub-optimally diversified". Julien Laplante |
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