Even strong hedge funds may go under

Date: Wednesday, December 10, 2008
Author: Wanfeng Zhou and Vivianne Rodrigues, Reuters.com

Even some strong and profitable hedge funds may not survive the ongoing credit crisis due to a lack of funding or credit, some top hedge fund managers said on Tuesday.

"There are going to be some firms that have good strategies that were strong in terms of discipline and their strategy itself, but may not survive this because they don't have the assets or the funding to be able to survive," Ken Webster, president of the John W. Henry & Co. fund, said at the Reuters Investment Summit in New York.

The hedge fund industry has been hit hard by the worst global financial and economic crisis in decades. The average hedge fund lost 17.70 percent in the first 11 months of 2008, the worst-ever performance, figures from Hedge Fund Research show.

In October alone, investors withdrew over $40 billion from hedge funds and assets under management in the industry declined to $1.5 trillion at the end of that month, a level last seen at the end of the fourth quarter of 2006.

"There are a lot managers that are going out of business that have underlying positions that are profitable" because they can't get the financing as a result of the credit crisis, Webster said.

J.W. Henry, which mainly uses trend-following style, has posted exceptionally strong performance this year. The firm's Global Analytics program is up more than 80 percent this year, while its international foreign exchange program has returned about 76 percent.

Good returns and strong performance may actually increase the risk of higher redemptions, according to John Taylor, chairman and chief investment officer at FX Concepts, the world's largest currency hedge fund, with $14 billion in assets.

Some of FX Concepts global funds are up more than 30 percent this year.

"We are liquid and people take the money assets," Taylor said at the Reuters Summit. "They need the cash. But thankfully we don't need borrowing."

DISCOUNTS, LOWER FEES

Cutbacks and shake-ups in the industry have already started, the fund managers noted.

On Monday, U.S. hedge fund giant Citadel Investment Group LLC announced it is closing its Tokyo office and its Asia principal investment operations by the end of this year. The fund, which managed about $18 billion as of a month ago, lost about 13 percent in November, bringing its full-year loss to 47 percent, investors told Reuters.

The struggle to hold on to capital may lead hedge funds to become more open to offering lower fees and packages to attract new clients and extend their stay, Webster of J.W. Henry said.

"I think you're going to see what we're all seeing now, which is continued shake-up in the hedge fund industry," he said. "There'll be a lot of external pressures on strategy that may force people out of the market. Overall, their strategy was working, but not in an environment like this."

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

(Additional reporting by Svea Herbst in Boston. Editing by Leslie Adler)