Hedge fund assets likely to lose up to $450bn

Date: Monday, January 26, 2009
Author: Saijel Kishan, Business Report

Hedge funds lost more money last year than any year on record. It may get worse this year, forcing fund managers to overhaul investment strategies, reduce fees and make it easier for clients to withdraw cash.

The $1.2 trillion (R12 trillion) industry might shed as much as $450 billion in assets, or 37 percent, through market losses and client withdrawals this year, Morgan Stanley analyst Huw van Steenis said on Friday.

That was on top of the $600 billion that disappeared last year, and would leave hedge funds with $750 billion, the lowest since 2002. "It's hard not to be bearish in this environment," said Van Steenis.

Investment returns fell by an average of 18 percent last year, according to data compiled by Hedge Fund Research. This was the most since the Chicago firm began tracking the industry

While that beat the 38.5 percent loss by the Standard & Poor's 500 index, many investors were angered when fund managers limited or froze withdrawals. Funds would have to reduce fees and loosen redemption rules to win back client confidence, said Craig Lilly, an attorney at Washington-based Squire, Sanders & Dempsey.

At least 20 percent of hedge fund assets were subject to redemption restrictions last year, according to Peter Douglas, the principal of Singapore-based consulting firm GFIA.

Some firms are already making changes. James Simons, who runs Renaissance Technologies in New York, said he would not charge fees on the Renaissance Institutional Futures Funds this year.

Cerberus Capital Management said last month that it would waive 60 percent of the incentive fee on Cerberus Partners for a year after losses were recouped.

Investors are seeking to establish separately managed accounts, while providing more disclosure on assets and easier withdrawals, according to Simon Hookway, the chief executive of MSS Capital in London.

Hookway's firm has formed a joint venture with hedge fund adviser IGS Group to help investors set the accounts.

Unlike hedge funds, managed accounts allow an investor to keep money separate from other investors and make withdrawals at will.