Hedge fund heyday – bigger is better

Date: Tuesday, April 24, 2007
Author: Charles Paikert, InvestmentNews

Thinking about starting a hedge fund?

It sure seems like the timing is right, considering the record inflows of more than $60 billion into hedge funds during the first quarter. Assets under management now total $1.6 trillion, according to Chicago-based Hedge Fund Research Inc.

But according to research by New York-based Morgan Stanley’s prime-brokerage unit, which caters to the funds, prospective entrepreneurs may want to think again.

As The Wall Street Journal reported last week, the 100 largest hedge funds now control about 70% of the money in the business, up from less than 50% at the end of 2003. And the 300 hedge funds with $1 billion or more in assets control about 85% of all hedge fund money.

As the big boys soak such a disproportionate amount of available capital, it has become harder for new kids on the block to gain traction. In fact, new hedge funds raised $10.5 billion last year, about 50% less than anticipated, according to Morgan Stanley.

Frustratingly for the newbies, investors are still flocking to the funds, attracted by a 2.8% return for the first quarter, according to HFR’s weighted composite index, compared with the Standard & Poor’s 500 stock index, which earned 0.64% for the same period.

That performance is clearly “motivating investors to increase their allocations to hedge funds.” said Ken Heinz, HFR’s president.

Rap on ruling

Maybe the court ruling that overturned the broker-dealer exemption rule isn’t the public relations bonanza the Financial Planning Association thought it would be.

Widely read syndicated newspaper and MarketWatch columnist Chuck Jaffe rained on the Denver-based FPA’s parade last week, writing that the ruling “could set back the progress made on [the advisory] front by a decade or more.”

Brokerage firms, he said, may begin using “some separate subsidiary” to provide financial planning services for a fee, “burying commissions in the process, making it harder for consumers to know precisely what they are getting for their money and how their money is being spent.”

Wealth creation

Don’t expect the wealth management boom to slow anytime soon.

According to a report released last week by The Spectrem Group Inc. of Chicago, the number of U.S. households with a net worth of $5 million or more, excluding a primary residence, rose to a record 1.14 million last year, surpassing the 1 million level for the first time. The number is more than quadruple the 250,000 households with $5 million or more in net worth reported 10 years ago, according to Spectrem’s “Affluent Market Insights 2007” report.

“The past few years have been nothing short of astounding for wealthy Americans,” said Spectrem managing director Catherine S. McBreen.

Even more (potentially) good news for wealth managers: According to newly published data, nearly one-third of U.S. millionaires don’t work with a financial professional.

Banking rankings

Expense control is all the rage among big banks these days, so Wachovia Corp. had reason to congratulate itself last week.

A yearlong initiative to tighten spending by upgrading technology, and cutting and consolidating jobs, paid off. The Charlotte, N.C.-based company’s efficiency ratio, or costs as a percentage of revenue, fell to 55.7% in the first quarter, from 60.1% in the year-earlier quarter.

Wachovia also scored well in a study measuring consumer perceptions of trustworthiness among retail banks, which was released last week by the Ponemon Institute LLC of Traverse City, Mich.

Wachovia tied for third place with Cleveland-based National City Corp. U.S. Bancorp of Minneapolis and Charlotte-based Bank of America Corp. were in first and second place, respectively.