One fifth of hedge funds may fail: Man Group exec

Date: Thursday, December 4, 2008
Author: Peter Starck,

Up to a fifth of managers in the $1.6 trillion hedge fund industry are at risk of going out of business in the next two years, a Man Group Plc (EMG.L: Quote, Profile, Research, Stock Buzz) strategist said on Wednesday.

Thomas Della Casa, head of the research, analysis & strategy group at Man Investments, told a briefing in Frankfurt one in 10 hedge funds tended to fold after a few years even in favorable market conditions.

"The number will go down from 10,000. In the next two years 2,000 (hedge funds) could perhaps disappear," he said.

Overall, hedge funds are on track for their third ever year of losses, based on industry data going back 18 years, Della Casa noted. Hedge funds last failed to earn money for their investors in 1998 and before that in 1994.

"Assets under management will remain relatively unchanged, we don't expect net inflows," Della Casa said about prospects for 2009. Many investors are likely to go on shunning risky assets, preferring to hoard cash for quite some time, he said.

"Every dollar parked on the sidelines and held as cash usually stays away from markets for about 12 months. We don't expect this liquidity to return any time soon.

"The beginning of 2009 will be hard. We will still see liquidations and fire sales," Della Casa said, referring to hedge funds and their assets, such as corporate bonds.

Yet such conditions could create buying opportunities, he said.

Credit was trading at $0.67-$0.68 to the dollar compared with a "normal" recovery value of $0.70, he said, adding Man Group saw "enormous opportunities here."

Man Group sees the global economic recession lasting at least between four and six quarters. With history as a yardstick, equity markets tend to bottom out half-way through a recession, Della Casa said.

Globally, investors withdrew $40 billion from hedge funds in October, leaving $1.56 trillion in assets under management, Chicago-based tracking firm Hedge Fund Research said on November 20.

October's redemptions exceeded the third quarter's net outflow of $31 billion as retail and institutional investors alike fled to the safety of cash after the collapse of U.S. investment bank Lehman Brothers Holding Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz).

London-based Man Group, the world's largest listed hedge fund group, said recently its assets under management dwindled to $61 billion by early November from $67.6 billion at the end of September, mainly due to the strengthening of the U.S. dollar.

(Editing by David Holmes)