Hedge funds bounce back from the crunch

Date: Tuesday, January 26, 2010
Author: The Times

News of my death has been greatly exaggerated,” Mark Twain is said to have told an audience in Europe in 1897 after reading a rather excitable newspaper report. In 2010, the hedge fund industry might be forgiven for saying the same thing.

This time last year, it was the pariah of the financial services industry. Investors, reeling from the shock of their exposure to Lehman Brothers, had lost their appetite for risk and fund managers were hamstrung by the ban on short-selling financial stocks. It seemed that the next thing the world would read of the industry was its obituary.

Yet last week, in a clear sign that confidence is returning to the market, James Harpel, a former Tudor Investment partner, joined forces with Kenneth Ginsburg, the former the European chief executive of SAC Capital, to launch a London-based fund named Althea Capital. This followed recent launches by Tony Chedraoui, formerly of Deephaven, who raised more than $800 million (£495 million) in assets for Tyrus Capital, his event-driven fund, and Patrick Degorce, co-founder of the activist hedge fund The Children’s Investment Fund Management, who set up Theleme Partners.

Moreover, the Chicago-based Hedge Fund Research (HFR) has reported that in 2009 the industry enjoyed its strongest gains since 1999, only a year after suffering its worst annual loss. Ken Heinz, HFR’s president, is bullish about the prospects for this year, too, tentatively estimating that the industry will have $2 trillion in assets by the end of the year, a 25 per cent increase on 2009.

True, the industry still lags behind its highs of 2007 and concern remains that proposed regulatory changes, such as the Alternative Investment Fund Managers (AIFM) directive, will drive fund managers out of London. The directive would mean higher capital requirements, limited gearing and reduced fund manager rewards and its critics, including Lord Mandelson, the Business Secretary, have branded it “badly flawed” and are lobbying hard to change the draft, with some success. Michel Barnier, the European Commissioner for the Internal Market and Services, has promised to come to London to consult fund managers about amending the proposal.

But not everyone thinks that new regulations and taxes will be the death knell for London. Savvas Savouri, Toscafund’s influential chief economist, has thrown cold water on the idea that there could be tumbleweed blowing through the streets of Mayfair. He thinks that London will attract at least 100,000 new jobs in the financial sector over the next decade, driven by emerging economies’ dependence on the City’s infrastructure to provide them with a Western hub.

Andrew Baker, chief executive of the Alternative Investment Management Association (AIMA), argues that “there is no evidence that the tap has been turned off in London”. Mr Heinz believes that the pressures in London are felt equally elsewhere.

According to Stuart McLaren, partner and hedge fund expert at Deloitte: “I think that London will remain a pre-eminent location for hedge funds, as people like to be close to their peers. New offices may be set up in Hong Kong or Singapore, but this is to meet a new demand in those markets, not as a replacement for London.”

Experts say that the more pressing question is how the industry will evolve to meet demands from investors still cautious about re-entering the market. Mr McLaren said that his clients had found that the time it takes from first contact with investors to them putting in their money has grown considerably. “In the past, people just focused on performance, but now people want to know about operational procedures, risk management, liquidity and how they can get their money back,” he said. In short, transparency.

The strategies that investors favour is also undergoing an evolution. Managed accounts, which offer a frequent flow of information and easier access to your money, are a favourite among institutional investors, which can afford the associated fees. Mr Heinz expects to see much more specialisation within the funds.

The evidence certainly suggests that we have not heard the last of the hedge fund industry, although, with 10 per cent fewer funds around now than in 2008, there is a long road ahead. One thing is certain — the hedge fund business that rises from the ashes in 2010 is going to be markedly different from the one that preceded it.