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Hedge fund veteran sees major growth ahead

Date: Tuesday, May 29, 2007
Author: Dane Hamilton, Reuters

NEW YORK (Reuters) - The biggest and best-managed hedge funds will grow exponentially in coming years, fueled by pension plans and others looking for portfolio diversification, a leading industry figure told investors on Thursday.

Philip Duff, who headed the $7 billion (3.5 billion pound) FrontPoint Partners hedge fund group until it was sold to Morgan Stanley (MS.N: Quotazione, Profilo) last December, said most corporate and public pension plans still have "significant asset-liability gaps" and will not be able to meet their funding obligations in coming years.

Furthermore, given the increasing correlation between domestic and international stock and bond markets, pension plans will be forced to look at hedge funds and other alternative investments as a diversification tool, Duff said at a New York conference.

The funds best positioned to benefit from this trend will be professionally managed with significant risk management controls, said Duff, an industry veteran who has been chief financial officer of Morgan Stanley and a top executive at Tiger Management, a pioneering hedge fund group.

"What you are really selling is trust and confidence," Duff said of hedge funds at the Argyle Executive Forum. "Brand is immensely important."

Reflecting this trend is a survey released this week that found that, for the first time, the two biggest hedge fund asset managers are JPMorgan Chase & Co. (JPM.N: Quotazione, Profilo) and Goldman Sachs (GS.N: Quotazione, Profilo), with $33 billion and $32.5 billion respectively in such assets. Such institutions are highly regulated, unlike the lightly regulated private partnerships which make up the bulk of the hedge fund industry, suggesting that investors feel they have less risk.


Duff comments come as the $1.5 trillion industry continues to grow, as reflected by FrontPoint, which he said grew by as much as $350 million a month with new pension fund assets in recent years.

Other premier hedge funds, including Bridgewater Associates, D.E. Shaw & Co., Renaissance Technologies, and Och-Ziff Capital are showing similar asset growth rates, even as the industry still suffers from a recurrent high-risk cowboy image that worries cautious pension plan managers.

This image was reinforced by the collapse of the well-respected Amaranth Advisors last year, brought down by a small team of energy traders in Calgary, as well as the equally spectacular fall of the blue-chip investment fund Long-Term Capital Management in 1998.

The industry also suffers its share of scandals, like Bayou Group and Wood River, which compounds this image, although proponents argue that fraud is no more widespread than in any other industry, only better publicized.

Duff, who said he plans to launch a new investment advisory firm this year, said the hedge fund industry remains "enormously fragmented," with some 8,000 to 10,000 funds. In coming years he expects a lot of consolidation, both from banks buying funds, like the FrontPoint-Morgan Stanley deal, and funds themselves consolidating.

"The largest five to 10 hedge funds have less than five percent of the market," Duff said. The industry "is likely to follow the track of other industries. You will see increasing concentration."