August May Be Jolt HFs Needed

Date: Tuesday, September 18, 2007
Author: Hedge Fund Daily

Sagging returns in August not only will knock some hedge funds out of business, but are likely just the jolt the industry needed to sock it out of its complacency, according to HF players. Mehraj Mattoo, head of alternative investments strategies at Commerzbank, told Bloomberg News, “The events of August may be one of the triggers leading to a cut in the number of hedge funds,” Mattoo said. He noted that there are “signs that a bubble is forming” in the industry that could mark the end of the explosive growth in the past few years that led to a 67% surge in the number of HFs in 2006. Meanwhile, David Smith, chief investment officer at GAM, said the industry has slipped into complacency, thanks to investors that have not demanded more of their managers. “As a result,” Smith said in an interview with Financial News, “hedge funds have stopped living up to the mandate of delivering absolute returns. It has become a delusion to believe in hedge funds making 15% in all market conditions.” The problem has been exacerbated by the influx of new hedgies looking to making their fortune but who focus on outperforming benchmarks, or following the leaders in the industry by copying their strategies. Smith recommends that long/short European equity managers should increase their use of derivatives tenfold and that hedge funds should make private equity investments, among other things. “The industry is not self-regulating like it was 15 years ago,” Smith said, “when the only investors in hedge funds were edgy private client firms that would withdraw from failing managers and put them out of business.”