Barclays sees hedge fund assets leveling off

Date: Wednesday, June 3, 2009
Author: Reuters.com

* Hedge fund assets seen ending year at $1.3 trillion

* Investors pushing back back on fees, lock-ups

* Pensions seen boosting exposure to hedge funds (Adds details from report)

By Joseph A. Giannone

NEW YORK, June 2 (Reuters) - Improving markets and a need to recoup 2008 losses will prompt investors to pour $50 billion into hedge funds this year and slow the pace of redemptions, but the money will come with strings attached, Barclays Capital said in a report on Tuesday.

More than 300 investors surveyed by Barclays' prime brokerage unit reported stashing, on average, 14 percent of their portfolios in cash. Nearly 80 percent of those investors said they plan to start putting some of that cash back into hedge funds.

"In spite of dramatic changes in the investor landscape, certain investors were ready to deploy their cash balances aggressively once markets stabilized," said Brian Reilly, global head of asset management investment banking at Barclays Capital. He also heads a joint venture with a Barclays unit that provides financing and trading services for hedge funds.

While money is starting to come back in, investors are pushing back on the fees they pay, the report said.

Barclays found respondents want not only a cut in the usual 2 percent management fee and 20 percent performance fee, they want yearly performance objectives that fund managers must meet before receiving incentives.

These investors also are asking funds that lock up money for at least three years -- typical in vehicles investing in seldom traded assets -- to not collect performance fees until that period expires.

Investors and managers were interviewed between December 2008, when markets were deeply distressed, and March 2009, the starting point of the current rebound.

North American endowments and foundations, the most aggressive investors in hedge funds at 14 percent of their portfolios, intend to reduce their exposure this year, Barclays found.

Pension funds, long restricted from betting on hedge funds, plan to boost their $437 billion allocation.

The hedge fund industry suffered record redemptions last year, fueled by weak performance exacerbated by a meltdown in financial markets last fall.

The slump led to a 20 percent decline in investable assets last year to roughly $60 trillion. Nervous investors also trimmed their hedge fund exposure to 2.4 percent of their portfolios last year from 2.6 percent at the end of 2007.

But conditions have improved in recent months, and Barclays expects redemption requests to slow, falling to 10 percent of total assets under management. In the 2008 fourth quarter investors withdrew 25 percent of the hedge fund industry's assets.

Global hedge fund managers predict their assets will bottom out at $1.2 trillion in the middle of this year and then level off at $1.3 trillion at year-end, said Barclays, which surveyed 100 hedge funds managing $700 billion of assets.

So while the pace of withdrawals may slow, industry assets under management are expected to shrink from $1.4 billion at the end of 2008.

Investors also indicated they will shy away from risky, illiquid strategies and focus more on simpler, liquid markets. There also is demand for credit and distressed debt funds.

Barclays said investors surveyed also were upset with funds that blocked withdrawals in the fourth quarter. Overall, about a fourth of redemption requests were blocked by hedge funds anxious to retain capital as markets imploded. (Reporting by Joseph Giannone; editing by John Wallace)