Outlook for global hedge funds positive

Date: Monday, November 2, 2009
Author: Ryan Huang, Channelnewsasia.com

The outlook for global hedge funds appears rosy with US pension funds likely to drive growth.

Observers said the challenge going forward will be in how regulations for the industry evolve and are implemented. They believe implementing tougher policies will be tricky as this could lead to funds relocating to countries with friendlier regulations.

The views arose from "Hedge Fund Symposium 2009", held at Singapore Management University on Friday.

Investors are demanding for more operational transparency and better risk management in the aftermath of the financial crisis. Tighter regulations are expected in the hedge funds industry, and some observers said defining and implementing such policies will not be straightforward.

They said this could drive some funds to seek out markets with more friendly regulations, such as Singapore.

Paul ffolkes Davis, senior bursar, Trinity Hall, Cambridge University said: "The size of banking bonuses, the way in which investment funds are regulated, we can also have too much transparency, you can be so transparent that the manager can't do anything.

"It is not just regulation that is likely to drive funds out of the UK. Britain is in a pretty perilous financial state, and taxes are being increased to, I think, an unsustainable level.

"If you are not a UK citizen, and you have a perfectly serviceable business model or hedge fund model, you can take it somewhere else, and I suspect that people will go where the regulatory touch is lighter and the taxation system is lighter."

Hedge funds had their worst performance in 2008, according to industry data such as the Eurekahedge Hedge Fund Index, which registered negative growth of 12.5 per cent.

Their significant losses led to massive redemptions resulting in a severe decline of 35 per cent in global assets under management, from the peak in mid-2008 at almost US$2 trillion to US$1.3 trillion in April 2009.

However, things are expected to turn around as investors return to the market.

Industry watchers also expect long-term investors such as US pension funds to drive the sector. These have been moving into hedge funds for more flexibility, after having been previously caught out due to overexposure to relatively illiquid investments, like private equities and venture capital funds.

Melvyn Teo, director, BNP Paribas Hedge Fund Centre, SMU, said: "Pensions funds may have come to realise that it is important to have absolute returns strategies because people with high exposure to equities and fixed income markets were severely hurt last year.

"And also people with high exposure to very illiquid strategies like private equity as well. So hedge funds are kind of like in the middle.

"Fund managers in the past, sort of benchmarked themselves according to how big they were and how much money they managed. I think increasingly the focus now is secure money instead of any kind of funds. So investors are worrying about who they are in bed with, so to speak."

Experts said that investors in hedge funds should take note of the profile of other investing parties.

This is because hedge funds typically prevent investors from redeeming their money once a withdrawal limit has been hit by others - a more likely scenario when they are short-term investors chasing hot money when a bubble bursts or there is bad news in the market.