Falling Returns May Be Uplifting For Hedge Funds

Date: Tuesday, July 31, 2007
Author: Hedge Fund Daily

If hedge funds in the future have to settle for single-digit returns, don’t expect long faces over the short fall; it only reflects the shape of things to come for the industry. This year, hedge funds experienced their best six months since 1999, with a 16.5% 12-month return to proud of, yet, Financial News reports, the industry is facing a new reality that wrongly placed bets, such as in the subprime mortgage sector, and a torrent of new assets are likely to make a repeat performance more difficult. That actually may not be as dire as it sounds. For one thing, poorer performance may make institutional investors, ever the greater source of HF money, happy. “Returns will fall out of the teens, even into single digits,” one hedgie told FN. “That is what institutional investors wants, a return of 8% a year with a volatility like bond and low correlation with other investments.” To make up for the potential loss of performance fees, funds that have been closed to investors for years are once again swinging open their doors, hoping to make their fortune in management fees from increased money flows. Among them are Tudor Investment Corp. and Tontine Partners, which have seen net returns of 24% and 38% a year, respectively. “The business model has changed and a lot of established firms are growing hugely,” Anita Nemes of Merrill Lynch told FN. Depending on management fees has fringe benefit, according to FN: Because they are more predictable, they’ll stabilize earnings and make it easier to go public.