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Hedge funds look good in 2009

Date: Monday, November 17, 2008
Author: Elizabeth Wilmot, The Straits Times

Transparency, quality of funds improving, says investment expert.

HEDGE funds are under fire these days but they are likely to provide good investment opportunities next year, according to a senior figure in the industry.

Mr Christophe Grunig, chief investment officer of Swiss fund Harcourt, told a gathering at Singapore Management University: 'Until the end of the year, it will be difficult. A strong deleveraging process has taken place, and there are redemptions.

'But in the medium term, 2009 could be an excellent year. There are huge trading and investment opportunities.'

Mr Grunig said the industry shakeout that is going on will mean less competition so hedge funds would soon no longer have to compete against powerful investment banks. That will lead to more funds being open for investors.

The industry consolidation is reducing the number of hedge funds, making life difficult for smaller operations.

'There's a natural selection, survival of the fittest, and there's a healthy consolidation going on,' he said.

The process will increase the quality of the remaining funds - giving investors another attractive incentive.

Transparency around funds has also improved in light of the furore that has flared in recent months amid the financial crisis.

But Mr Grunig cautioned that there was a need to face the sobering present first, which involves an on-going global deleveraging process that is accelerating the risk of illiquidity.

'Selling securities in an illiquid market is very difficult and that will dominate the performance of hedge funds till the end of the year,' he said.

The credit crunch is also causing market insecurity and a further decreased appetite for risk.

He also warned that lessons first had to be learnt from the crisis before the hedge fund industry could rally.

One was that counterparty risk should be diversified; another centres on the dangers of misusing leverage.

Yet Mr Grunig remains optimistic: 'Overall, this cleansing of the financial industry will have a positive impact on hedge funds in the market.

'The long-term view for us is that the hedge fund industry will recover partially from what we're seeing now.'