Outlook stable for hedge funds in 2011, says Moody's

Date: Thursday, March 24, 2011
Author: Wendy Chothia, HedgeWeek

The 2011 credit outlook for hedge funds is stable overall, with signs of improvement underpinned by the industry's positive performance and profitability, says Moody's Investors Service in an Industry Outlook published today.

Moody's report highlights that the hedge fund industry has registered strong performance since the latter part of Q3 2010, which has resulted in renewed market confidence and net investor inflow. Odi Lahav, a Moody's Vice President and Senior Credit Officer explains: "The current economic environment and the likelihood of a protracted recovery in the US and in Europe favour flexible investment mandates, and as such, hedge funds are well positioned to increase their respective share of global investment capital". Although the environment is likely to remain volatile, Moody's believes that barring a major market event, this trend looks set to continue in the short term.

Moody's believes that the downturn and post-crisis environment has also resulted in structural shifts amongst several hedge fund industry stakeholders, particularly pension funds and banks. Lahav adds: "institutional investors, particularly pension funds, are likely to materially increase their allocations to hedge funds and other absolute-return vehicles." The report also discusses how the regulatory and market pressures faced by the banking sector impact the hedge fund industry in several ways.

Indeed, investor-base composition changes, which on balance are considered to be positive in the industry outlook, could lead to strategic challenges in relation to distribution, product development and market positioning. Despite these issues, Moody's outlook for hedge funds' operational quality is positive, as investor demand and regulation of hedge funds result in hedge fund managers paying closer attention to their operational infrastructures.