Deutsche Bank Sees Hedge Funds Topping $2 Trillion

Date: Tuesday, November 10, 2009
Author: Bloomberg.net

Hedge fund assets may top the previous $2 trillion high by the end of next year as double-digit average returns lure investors, said Barry Bausano, Deutsche Bank AG’s global co-head of prime finance.

Hedge fund assets parked with Deutsche Bank have risen recently and global investors plan to allocate new capital next year, New York-based Bausano said during a visit to Hong Kong on Nov. 6. His division provides services and products ranging from securities lending to financing and derivatives to the industry.

“We fully expect to see material inflows into 2010 and beyond,” said Bausano. “The expected growth is reflective of continuing institutional demand for increased risk-adjusted returns in the face of low bond yields and disappointing passive equity performance.”

Global hedge funds have rebounded faster than projections by investors in a Deutsche Bank survey in February, even as regulators study ways to increase scrutiny of the industry and managers including Galleon Group’s Raj Rajaratnam face insider trading charges. Hedge fund assets recovered to $1.53 trillion by September, from this year’s trough of $1.33 trillion in March, according to data from Chicago based Hedge Fund Research Inc.

Hedge fund assets shrank as much as 31 percent from a June 2008 peak of $1.93 trillion after last year’s record annual investment losses and investor withdrawals, HFR said.

HFRI Fund-Weighted Composite Index gained nearly 17 percent in the first 10 months, HFR said in a statement Nov. 7. More than two-thirds of hedge funds had inflows in the third quarter, HFR said last month.

Market Share

More than 60 percent of 1,000 investors surveyed by Deutsche Bank in February suggested hedge fund assets may fall 11 percent this year to $1.33 trillion by December.

Banks’ prime finance revenue fell as the industry shrank.

“We estimate the aggregate industry-wide revenue was down between 30 percent and 40 percent 2009 versus 2008,” said Bausano. “We expect to be up slightly this year, reflecting Deutsche Bank’s gain in market share but also the quality of our client base.”

Deutsche Bank and Credit Suisse Group AG were among banks likely to take market share from the dominant prime brokerage duo of Goldman Sachs Group Inc. and Morgan Stanley as hedge funds spooked by the collapse of Lehman Brothers Holdings Inc. last year moved business elsewhere, Sanford C. Bernstein & Co. analyst Brad Hintz said in a March report.

Asia Growth

The Asia-Pacific region is a priority for Deutsche Bank’s prime finance division, added Bausano, who was attending the company’s annual Asia managers forum in Hong Kong where 45 managers met with more than 200 hedge fund investors.

“The high level of economic growth is going to be mirrored in assets under management across all asset classes and hedge funds in particular,” Bausano said. “The diversity of the 12 or so markets is really an investor’s paradise.”

Growth in Asia will probably accelerate to 5.8 percent next year from 2.8 percent this year, the International Monetary Fund said last month. That compares with an IMF forecast expansion of just 1.25 percent in 2010 in the Group of Seven economies.

Deutsche Bank has hired 15 prime finance staff since the fourth quarter of 2008, said Harvey Twomey, Hong Kong-based head of Deutsche Bank’s prime finance institutional client group in Asia-Pacific.

The bank announced in September the transfer of David Murphy from its New York office and the hiring of Merrill Lynch & Co.’s Nathan Davison to co-head the division in Asia.

Startups

One defining characteristic of the Asian hedge fund industry this year has been the scale and quality of startups, Twomey said. Startup costs in Asia have always been lower than London or New York, he added.

“There’s also been a backlog because it was very hard to start a fund in 2008 during the eye of the storm,” Bausano added. “As the market emerged from 2008 into 2009, if you were a confident, successful investment manager in the key lieutenant position in a firm, the opportunity cost of leaving was probably never lower.”

Deutsche Bank has been tracking 45 to 50 Asian hedge fund startups that have or will have started investing from January this year to March 2010, Twomey added. About 25 of them have chosen Deutsche Bank as a prime broker from day one.

Regulation

Hari Kumar, a founding partner of TPG-Axon Capital Management LP; ex-Goldman trader Shafiq Karmali; former Citadel Investment Group LLC executive Nick Taylor; and Stark Investments principals Teall Edds and Stuart Wilson were among those who started their own companies in Asia.

Rajaratnam, the founder of hedge fund firm Galleon, was taken into U.S. custody on insider-trading charges last month, while Helmut Kiener, who founded the K1 Group hedge-fund firm, was arrested in Germany last week.

As part of a regulatory overhaul in the wake of the global financial crisis, U.S. President Barack wants to bring hedge funds and private-equity firms under federal supervision for the first time.

The European Union proposes to set up industrywide debt limits for hedge funds and private-equity firms, as well as requiring managers to get regulatory approvals and to report strategies and exposures so authorities can monitor risks.

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