Hedge Funds Lure Still Hot But Success Uncertain

Date: Wednesday, April 9, 2008
Author: Reuters

Wall Street bankers and traders, fearing possible layoffs, may strike out on their own and try to launch new hedge funds in the coming weeks, a top industry official said on Tuesday.

However, many are expected to fail as investors are demanding better track records in the once-hot sector chilled by dismal losses this year, she added.

"You will see a large number of people with big names and reputations trying to start up hedge funds," said Jane Buchan, CEO of Pacific Alternative Asset Management, a $10 billion hedge fund of funds that selects managers for pension funds and other large clients.

"Prop trading is becoming less lucrative and more talent will try to migrate to hedge funds," she said, referring to trading with employers' capital.

On her frequent trips to New York from her home base in California, Buchan said she often meets with bankers who are seeking advice on starting one of these loosely regulated portfolios in the once red-hot industry.

"Now the barriers to entry will be bigger and it will be a lot more difficult," Buchan said at the Reuters Hedge Fund and Private Equity Summit. "The days of two guys starting a hedge fund in a garage are over."

Buchan's clients, including pension funds like the Massachusetts state portfolio, are demanding better infrastructure and longer track records from the hedge funds they may be eyeing, and shying away from funding the newcomers in difficult markets.

At the same time, high net worth investors, a traditional source for hedge fund capital, are becoming more skittish now that hedge funds are turning in some of their worst returns ever amid tumbling stock markets, a deepening housing crisis and slower U.S. economic growth, Buchan said.

Preliminary data from the Hennessee Group show hedge funds slipped 1.9 percent in March and are now off 3.5 percent for the year.

This marks a dramatic shift for the $1.8 trillion hedge fund industry, whose assets doubled in about three years. Thousands of alumni from Goldman Sachs and other Wall Street firms launched roughly 10,000 fund hedge funds over the last two decades.

For example, only a few years ago Jack Meyer, who once oversaw the investment of Harvard University's $35 billion endowment, quickly raised $6 billion.

"The opportunities are huge but the financing has to be very solid and it isn't these days," Buchan said.

(For summit blog: http://summitnotebook.reuters.com/)

(Reporting by Svea Herbst-Bayliss, editing by Richard Chang)