Hedge funds set to grab larger slice of the investment cake

Date: Wednesday, January 20, 2010
Author: Joanne Harris, HedgeFunds Review

Hedge funds will start to challenge investment banks for a share of the institutional investment market over the next 20 years, according to financial services experts.

The industry will become more popular because it makes money for investors and not shareholders. However, impending regulation could have negative consequences for the industry.

Experts, including Man Group chief executive Peter Clarke, gave their thoughts on the next 20 years facing the financial services industry in a report produced by the CBI (Confederation of British Industry) and PricewaterhouseCoopers (PwC) to celebrate the 20th anniversary of their joint financial services survey.

The report noted the impact of a number of recessions and financial crises over the past 20 years. As a result the interviewees all saw significant changes ahead for the UK's financial services industry.

They predicted that while the largest investment banks would survive, some of the "riskier" business lines could go elsewhere.

"I wouldn't be at all surprised to see a new class of institution coming out of the hedge fund or private equity sectors to fill the void left by the old standalone investment banks that have now been swallowed up," said journalist and former investment banker Philip Augar.

Bank of America Merrill Lynch Europe, Middle East and North Africa president Jonathan Mouldes added: "In parts of the trading businesses, technology now plays a key role and some of the alternative players like the hedge funds have excellent infrastructure and technology. They increasingly have the ability to compete in sectors such as algorithmic trading, certain types of flow derivative and foreign exchange trading. As the market moves towards more central clearing, that levels the entry playing field."

Man's Clarke said the hedge fund sector would increasingly be defined as an investment strategy rather than an asset class.

Interviewees said more regulation of the financial services sector was inevitable. Barclays chief executive John Varley said governments "would be on the shoulders" of the industry for another 30 years, "and with some justification".

They were worried that too much regulation could damage the reputation of London as a financial services centre.

"Regulators need to draw the distinction between the proprietary trading activities of banks - where traders take risk on behalf of a bank that should be a lower-risk business and investment managers who take on risk as part of a mandate from an investor who expects a return," said Clarke.

However, respondents thought London would remain an important centre in the future. HSBC Holdings chairman Stephen Green said: "I don't believe London's critical mass has been seriously undermined by recent events."

Launching the report, CBI director-general Richard Lambert said the UK needed to learn lessons from recent years and build a regulatory and tax structure encouraging growth and competition.