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Global hedge fund industry facing shakeout

Date: Wednesday, February 6, 2008
Author: Raji Menon, Thomsonimnews.com

New book from Mercer highlights concern about the fast-growing industry - where there are '8,000 planes in the air and 100 good pilots'.

LONDON (Thomson IM) - A 'shakeout' is expected among global hedge funds amid increasing concern about the fast-growing industry, according to a new book launched by consultants Mercer.

The book is based on interviews with key figures in the global investment industry including Stan Beckers, head of alpha management at BGI and Ray Dalio, chairman and CEO at Bridgewater.

On hedge funds, Dalio noted: 'As a client recently said: there are about 8,000 planes in the air and 100 good pilots.'

The book authored by Harry Liem, a senior associate at Mercer, said investment managers will need to adapt and innovate to avoid falling into a two-tier industry of outperforming alpha fund managers and those left behind to chase scarce market returns.

Liem believes the ability to sustain future superior performance will define the funds management industry in the coming years.

He added: 'Institutional investment is based on the search for alpha or out performance, however, active investment managers have long battled against the erosion of alpha as their ideas and processes are taken up by competitors. The best of them are constantly searching for new ideas and new sources of information to maintain their competitive advantage.

'Only those players able to adapt themselves faster than their competitors will maintain their leading edge.'

According to Liem, transaction costs will come down as the number of derivative instruments increases, the skill of the average player increases and capital markets become increasingly inefficient.

'Ultimately, we will keep finding new betas that explain what was once presumed to be skill, hence pure alpha will become rare indeed,' he added.

By Raji Menon: +44 (0) 20 7422 4954; raji.menon@thomson.com; www.thomsonimnews.com