Big hedge funds growing bigger

Date: Monday, March 10, 2008
Author: James Mackintosh, Financial Times, Gulfnews.com

The study by Pertrac Financial, a software company, found 350 of the 15,250 hedge funds it identified had more than $1 billion, up from 250 last year, and that among them they controlled $950 billion.

The biggest hedge fund managers have scored successes with institutional investors helping big funds grow bigger.

At the same time, the environment has been getting tougher for new launches, with Pertrac confirming that the number of start-up funds had dropped sharply in 2006, with only three-quarters as many start-ups as the previous year. The firm tracks new launches a year in arrears because many new funds wait a year before reporting.

Meredith Jones, managing director, said the slowdown in launches was a sign of the industry maturing. "In addition, the decrease in new fund launches reflects the asset flow trends in the industry since, in many cases, assets flow to larger established hedge funds and funds of funds, which is somewhat of a deterrent for new entrants into the marketplace."

However, the study - produced by combining 12 independent databases - found large numbers of tiny single-manager hedge funds continue to survive, with more than 40 per cent of funds having less than $25 million under management. There were 36 funds with more than $5 billion, a figure likely to be magnified further by use of borrowed money. It remains unclear among how many managers the big funds are spread, as the study did not link the managers to the funds they run.

But the study found that in total just over 4,600 different managers reported performance to at least one database, about the same as last year.

Dilemma

A Canadian chief, operating out of London, living in Germany, using a Swiss lawyer to defend against accusations by a US regulator that companies based in Caribbean tax havens fraudulently raised more than $300 million - welcome to the global hedge fund industry.

Lake Shore Asset Management, run by Philip Baker, stands accused by the US Commodity Futures Trading Commission of misappropriating $11 million from investors after raising cash on false pretences. It denies the claims.

Such international operations show how hard it is to regulate hedge funds, nimble and typically offshore investment vehicles run by some of the smartest people in the world for the benefit mainly of the richest.

Regulators have been grappling with hedge funds since 1998, when the collapse of Long-Term Capital Management, then one of the biggest hedge funds, almost brought down the fin-ancial system.

One conclusion has been that hedge funds with few restrictions on what they can do are generally a good thing, making markets more efficient and adding liquidity - as long as they do not blow up or steal investors' money.

"Hedge funds operate in the shadows, and they have to, they can't publicise everything they do," said one US regulator.

Yet there is a dilemma for regulators. If they get too heavy with hedge funds, agile managers can quickly uproot themselves and move to a more friendly jurisdiction. If they do too little, they run the risk that a repeat of LTCM could bring down a bank, or that managers could rip off investors.

Bradley Ziff, head of global hedge fund advisory at Oliver Wyman, said: "The implication is that if the regulatory regime in either the US or UK were to get sufficiently unfriendly then it is clear to regulators that hedge funds - unlike a bank - could move their trading operations offshore."

The latest attempted solution to this problem is to use voluntary codes.

A British code - supported by the 14 largest managers in London - is due to take effect at the end of the year.

Big US funds and investors, pulled together by the President's Working Group on Financial Markets, are expected to publish their own guidelines in weeks.

Regulators are also working together far more closely than in the past in an effort to detect crime.