Turmoil May Accelerate Fund Consolidation

Date: Wednesday, June 14, 2006
Author: Chidem Kurdas, New York Bureau Chief

NEW YORK (HedgeWorld.com) - Today's tough markets favor multi- strategy managers with large organizational backing, according to Tanya Beder, chief executive of Tribeca Global Management, part of Citigroup.

With many middling hedge funds now struggling in the face of losses in equity markets around the world, the movement toward multi- strategy institutional platforms will gain momentum, she argued at a press conference. That change has just started, and the events of this May will give it a push, she said.

Emerging markets and long/short equity strategies have in recent years been stalwart sources of returns for a large number of funds, which have lost heavily in the stock downturn. The writing is on the wall that there will be thousands of fewer hedge funds in a year or two, said Ms. Beder.

She sees faster trends that require managers to move capital quickly across markets and strategies. For instance, within a year convertible arbitrage went from being a solid money maker to a failure abandoned by investors. Now, it has come back as one of the very few hedge fund sectors that were profitable in May.

You need to deploy money quickly as opportunities come and go, and for that you need to diversify and have people across the world trading in many markets and strategies, Ms. Beder said.

That suggests that the common hedge fund business model of a small firm with a couple of traders and a single strategy is in danger of going the way of dinosaurs. Examples of the new type of organization include Highbridge Capital Management, part of JP Morgan since 2004, and Dillon Read Capital Management, an alternative investment unit launched by UBS, as well Citigroup's own wide-ranging $40 billion alternatives division.

The advantages of substantial organizational infrastructure and enhanced ability to purchase expensive technology are part of what's behind this institutionalization. Ms. Beder argued that the change further benefits investors because capital can be reallocated more expeditiously within such platforms.

In response to rocky markets in May her group moved several times as much money around as it does in a regular month. You need to prepare and adapt with a different business model, she said. She expects gifted traders increasingly to seek to work within large fund groups instead of starting independent firms as they have in the past.

 As for the fund of funds sector, she predicts a huge consolidation, with only those with the capability to move money fast left standing. The challenge for a fund of funds would be how to quickly redeem and invest - withdrawing from a hedge fund is typically permitted only in a quarterly or longer time frame.

Multi-strategy shops don't have that complication because they reallocate money internally. Hence they're less likely to get trapped in a strategy that's no longer working.

As Ms. Beder describes it, the impact of the market drop is far from over. There are wild cards like redemptions from mutual funds - if investors start withdrawing en masse the way they did in 20002002 as technology stocks went down, markets could take turns for the worse, with adverse consequences for hedge funds that can't diversify away from holding equities.