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Hedge fund numbers to shrink greatly - Citigroup

Date: Tuesday, September 27, 2005
Author: Steve Hays- Reuters.co.uk

MONACO (Reuters) - The number of hedge funds operating globally will shrink sharply over the next five years as rising cost structures and short-lived market trends divide the industry between boutiques and very large multi-strategy funds, the head of Tribeca Global Management said.

"There are 8,000 funds today and these will go down dramatically to 5,000 or fewer over the next five years and there will be a bifurcation in capacity," said Tanya Styblo Beder, chief executive of Tribeca, Citigroup's single manager proprietary hedge fund unit.

"Such a decrease will stem from rising cost structures as you will need a lot of scale to survive," she said, speaking to a symposium held by the Information Management Network on high-performance investing.

Styblo Beder said boutique hedge funds would specialise in areas such as trades linked to catastrophic events, insurance derivatives and credit arbitrage. Very large funds would focus on multi-investment strategies.

"The nature of market trends is changing and it will become increasingly difficult to survive. Three years ago trends were months long and slow moving. Now the top 10 to 20 trends tend to be less than four weeks and most of the money is made in the first 72 hours -- how do you trade that?" she said.

This phenomenon can be particularly seen in areas such as global macro strategies, which bet on big economic trends in equities, debt, commodities or foreign exchange markets, and in statistical arbitrage that exploits small differences in prices between different securities.

"At the start in statistical arbitrage people made fortunes, then the trend flattened out and some people even made losses," Styblo Beder said.

The role hedge funds are playing in rapidly spotting and profiting from mispricing opportunities is reducing the volatility of financial markets overall and ultimately making trading harder for the funds themselves, she added.

As a result, past investment performance is becoming increasingly less of a guide to future market trends, and hedge funds will have to adopt a more forward-looking approach with greater tactical asset allocation.

"I don't think the party is over. I just don't believe that there will be markets with very high returns for long," Styblo Beder said.

"A good portion of future returns will come out of portfolio constitution, and the current industry is not structured to do that very well. People are going to get a lot less micro," she said.