No quick recovery for hedge funds

Date: Monday, March 16, 2009
Author: Stuff.co.nz

The hedge-fund industry is unlikely to recover fully until 2013, and about a quarter of all hedge funds will close their doors in the next 12 months, analyst Brad Hintz said.

Hedge-fund assets will decline by 18.2 percent this year before bottoming out in 2010, resulting in total assets of less than $1 trillion (714 billion pounds) until an expected recovery in 2013, Hintz estimated.

This compares with a mid-year peak of $2.2 trillion in 2008.

"The reduction in assets under management in the hedge-fund industry suggests that banks and brokers will book significantly lower revenues from these clients over the coming year," he said.

Hedge funds are investment funds permitted to pursue a wider range of strategies than traditional funds.

The bulk of the world's hedge-fund industry is based in New York and London where they are largely supervised via their prime brokers, which are banks.

The decline in hedge-fund assets is expected to cause a 32 percent fall in prime-brokerage revenue and a 52 percent drop in prime-brokerage earnings, Hintz said.

"But prime brokerage faces more than the challenge of a simple cyclical revenue decline," he said.

The relationship between prime brokers and hedge funds has changed, and hedge funds will no longer accept massive counterparty exposure to prime brokers, Hintz said.

This in turn will result in permanent changes in the structure and profitability of the prime-brokerage industry, he added.

With the prime-brokerage business in structural transition -- as hedge fund clients move services from the securities firms and toward competitors -- leaders in the business like Morgan Stanley and Goldman Sachs Group Inc have been experiencing declines in market share, he added.

"However, several firms that have the market share and global capital markets capabilities will form a core of leaders in the prime brokerage market of tomorrow," Hintz said.

He believes the approximate order will be: JPMorgan Chase and Co, Goldman Sachs, UBS AG, Morgan Stanley, Deutsche Bank, BNP Paribas, Credit Suisse Group, Bank of America, Barclays and Citigroup.

Wall Street's prime-brokerage business, which has profited from the growth of the hedge-fund sector, posted peak revenue of over $12.4 billion last year, the analyst said.