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Hedge Fund’s Book May Have Fallen 75%, FRM’s Tomlinson Says

Date: Wednesday, April 22, 2009
Author: Bei Hu, Bloomberg.com

Assets owned by hedge funds including borrowings may have fallen by 75 percent to a decade- low, with less competition paving the way for better returns, said Blaine Tomlinson, chairman of Financial Risk Management Ltd.

The total book size of assets owned by hedge funds may have declined to $2 trillion, from $8 trillion, he said at the GaimAsia 2009 hedge fund conference in Hong Kong today, reducing the industry to a level last seen a decade ago. Tomlinson founded Financial Risk Management, a London-based fund of funds manager overseeing $10 billion, in 1991.

“This is pretty important because it means that there’s far less competition for alpha opportunities,” which refers to the premium that an investment earns over a certain benchmark, said Tomlinson. “So we think conditions are very favorable for a run of strong performance like we saw in early 2000.”

The worst average annual performance on record and investor redemptions reduced hedge fund assets managed by the industry globally by 27 percent to $1.4 trillion by December from a mid- 2008 peak, Chicago-based Hedge Fund Research Inc. estimated. Lending to the industry has dried up amid a crisis that has laden global financial institutions with more than $1.3 trillion of losses and writedowns, according to Bloomberg data.

Overall hedge fund leverage, or borrowing, fell to 1.15 times assets in October, from almost two times 12 months earlier, U.K.’s Financial Services Authority said in a semi-annual survey last month.

The HFRI Fund Weighted Composite Index, compiled by Hedge Fund Research, retreated 19 percent last year, the worst performance since records began in 1990. The index gained 7.7 percent in December 1999 and 6.2 percent in February 2000 in two of its best months on record.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net