More Hedge Funds Likely to Collapse: BofA

Date: Friday, April 11, 2008
Author: Reuters

There will be more hedge fund collapses this year as many managers struggle to borrow the new money they need to trade with and face investors disappointed by recent losses, a top industry executive said.

"The level of blowups will continue," said David Bailin, who heads Bank of America's alternative investment group, which invests in roughly 100 hedge funds. "Some funds simply will not do well, particularly those specializing in fixed-income markets," he said at the Reuters Hedge Fund and Private Equity Fund Summit in New York. "It will be rough trading for the rest of the year."

As a group, hedge funds recorded their worst-ever quarter in the first three months of 2008, and managers overseeing some $3.9 billion in assets have already shut down their businesses, according to data from trade magazine Absolute Return. Peloton Partners and the Sailfish Multistrategy Fixed Income Fund rank among the year's biggest casualties so far. The industry has roughly 10,000 funds.

The pressure for hedge fund managers is two-pronged, Mr. Bailin said. Investors are hastily handing in redemption notices to get their money out. Meanwhile, bankers are getting stingier with loans after having written down billions of bad debt recently. "If this condition [of stingy lending] lasts for a long time, then it can dampen returns," Mr. Bailin said, adding that the industry "does need leverage for returns."

Bank of America, for example, last year fired roughly 15% of the hedge fund managers it uses. Mr. Bailin suspects other large investors are also scrutinizing their managers more closely than ever before, ready to act fast in case a manager stops performing the way he promised he would. This can hasten the pace of potential collapses.

"We are not big fans of quant funds," Mr. Bailin said, speaking about a group of once-popular and top-performing hedge funds that rely on computer models to make trades. These types of funds, including, for example, AQR Capital Management, hit rough times last year and might find it tough to convince investors to stay on, Mr. Bailin and other guests at the summit have said. "People are willing to trust black boxes only when they work," he added.

Across the board, large investors like Bank of America are demanding more and better risk management at funds in which they invest. They also want to see track records of roughly five years and often as much as $1 billion in assets from other investors. This makes it more difficult for bankers and traders at Wall Street firms or mutual funds to quit and launch their own hedge funds, guests at the summit agreed.

By Svea Herbst-Bayliss
Svea.Herbst@Reuters.com