Hedge funds focus on asset growth

Tudor Investment Corporation, with net returns of 24% a year, is marketing its funds and has cut the length of its lock-ins, the minimum period for investors to stay in the fund, from two years to three months, according to investors.

Tontine Partners, a US manager with net returns of 38% a year, is seeking new capital for its funds, according to investment consultants. They join established managers SAC, Caxton, Renaissance Technologies and Pequot in trying to attract new investors.

Many managers predict investment returns will fall over the long term and regard raising assets under management as the way to maintain or increase their fee income, say consultants.

Generating more income from management fees, rather than performance fees, will stabilise their earnings and make them easier to float on the public markets.

Anita Nemes, head of European capital introduction at Merrill Lynch, said: “The business model has changed and a lot of established firms are growing hugely.”

A fund of hedge funds manager said: “Good, smaller firms are offering us 50% discounts off their normal fees, charging 1% management fees and 10% performance fees instead of the standard two and 20, to compete with the big firms.”

Hedge funds have just recorded their highest half-yearly returns since 1999, generating an average net return of 8.7% in the six months to the end of June, according to data provider Credit Suisse/Tremont. But investors said returns will fall.

Gary Vaughan-Smith, co-founder of fund of hedge funds SilverStreet Capital, said: “Returns will hold up for another 18 months but I don’t think 2009 will be so good.”