Poll: Hedge Funds Doomed?
Poll: Is the Hedge Fund Industry Doomed?
I recently began a poll within a Linkedin.com discussion group on the hedge fund industry and whether it was doomed or will be well positioned for great growth after this crisis passes. Below are the numerous comments from investment professionals on this topic - please feel free to add yours below within the comments sections:
Hedge funds are the new Investment Banks. Say goodbye to 2 and 20, but I for one believe that they are positioned to evade the coming regulatory maelstrom and over the next four years will outperform the market. Thats just my two cents though.
Falling markets and tighter regs will show if there is actually any alpha at all.
If there is then hedge funds will surely recover. If there isn't then they don't really deserve to...
The ones who deliver alpha, will stay, the others...will crash and burn. No one will cry
If ever there was a case for hedge funds the current market highlights it
Firstly, in complex markets, short sellers are akin to investigative journalists, looking for the scoop of finding an overvalued company or industry. Also like journalists, short sellers aren't always popular with corporate management or regulators.
Hedge funds managed to operate profitably outside the morass of mortgage-based securities. They are lightly regulated, in contrast with traditional investment and retail banks. This means that the least regulated financial institutions were the ones that identified problems in the most regulated parts of the industry.
Forensic accounting experts at hedge funds have performed the hat trick of being the first to signal, through short selling, troubles at Tyco, Enron and now Fannie Mae, Freddie Mac and banks.
Hedge funds and their short sellers deserve thanks for delivering information to markets. But alas, it's human nature instead to blame the messengers of bad news, especially when the news turns out to be true.
With my Australian focus I can add that while there will no doubt be an industry shake out in Australia similar to that which is happening around the globe, the good news for managers left standing is that there is a strong appetite for alternative investments. Institutional Investors and their advisors are looking for quality alternative investments.
In these fear ridden times it is worth looking at the relative performances of hedge funds versus market indices. The HLA Aus Long Short Index was down 5.77% in Sep, which was pretty steep but compares well relative to other indices - HFN Long Short Equity Index (-6.57%), the ASX 200 Accumulation Index (-9.85%) and the MSCI World Index (-11.89%). The longer term performance numbers are very compelling for hedge funds and because they have not lost anywhere as much as long only investors are in a much better position to benefit from any future correction.
Therefore I believe that there is a strong case for hedge funds, perhaps a smaller universe in quantity and an increase in quality.
Well i believe this is the perfect market for hedge fund area....There is tremendous opportunity in market to invest and sleep .By the time you wake up i.e. 2009 end or 2010 you have not even outperformed the market but you have given the new edge to this area.
Opportunity in a way you really need an eye for it...look for DIstressed securities, merger arbitrage wave is already there , natural resource is already oversold look for it...big speculation in FX Exchange market...
So in short, this is the time to get your investor confidence and act rather than sit.
Just my view..
Hi, All. You are right, this should be perfect conditions for HF to perform. Did they perform? Not all of them, at least the good one will survive.
My questions then is about HF domicile. In the current market conditions and looking at the impact of this crisis on the real economy. What will be the reaction of politicians around the world? They are convinced that this is the right time to kill offshore places. Politicians are under pressure to find money for their budget. It could be good to see all that money sitting in offshores places coming back home??
What are the domicile of most the HF? offshore places! Will it possible for all of them to find more regulated environment if need be?
In the past year , it would appear that some of the hedge fund managers seem to have forgotten to hedge some of their positions.My sense is that the year 2008 will probably be remembered as the year of the "Hedge Fund Shake-Out" , with only the exceptional fund managers remaining and possibly MS and GS being more active in the hedge fund space as they won't be able to apply that much leverage onto their balance sheets as they are now bank holding companies . To try to answer the question , my opinion is that there will be less participants going forward ,however , exceptional managers (Paulson, Simons etc) will thrive.
Doom and recovery are currently equally likely, in my opinion. The next 3-6 months will be show whether there is a future for the hedge fund industry. If there will be cases of fraud surfacing or ugly legal disputes about small print, hedge funds will experience a loss of confidence similar to the investment banks, or "banks" in general. In case of a confidence crisis, hedge funds will become as stigmatized as for example CDOs.
The tale of higher volatility increasing alpha opportunities has been marketed many times already. It neglects that high volatility also increases the probability of being wrong from the viewpoint of the investor. As we have seen over tha last 12 months, higher volatility mainly increases dispersion of results. Given the zero sum characteristics of the alpha game, this will mainly lead to deteriorating hedge fund performance on a risk-adjusted basis in investor portfolios.
Personally, I believe that we are confronted with a gap between investor expectations and the product characteristics of real-world hedge funds. There are definitely issues with the promised "absolute return" features, redemption gates, side pockets and similar conjuring tricks are supporting concerns raised by investors in the past on several occasions. A forthcoming "Hedge Fund 2.0 industry" will have to address these issues.
The reason the current situation is called a "crisis" is that investors (and also money managers) are experiencing somthing which has been termed "fundamental learning": During this crisis, not only the industry will change, but also the perception of industry participants. This is the difference between a "crisis" and a "drawdown": eventually, recovery takes place, but the "world will look different and will be perceived differently" in the case of a crisis.
Another interesting question is what will happen to the "convergence theory": Due to excessive framing on median characteristics, traditional funds / traditional asset management is also experiencing an expectation gap. Wealth management clients in all corners of the world are seeing their capital preservation preferences being trampled under foot. So-called "balanced" accounts are currently experiencing drawdowns of -20% (and the bottom is probably not reached yet).
Black swans, the Perfect storm, fat tails (on both sides), correlation breakdowns and reversals, contagion / unexpected transmission mechanisms - all participants are undergoing fundamental learning in risk management topics. Personally, I hope that the current crisis will result in a general realignment of investment services with client preferences. It is badly needed, in the alternative as well as traditional part of the money management industry.
Just my two cents, unleveraged and not mortgage-backed ones, that is...
I agree with Andreas comments on the gap between how hedge funds are (were) perceived and the reality of their characteristics when market conditions worsen and his hope for a general realignment of investments services with client expectations.
I also like his views about the convergence theory .
There is no doubt that most Hedge Funds are in trouble and will remain under pressure for a while. There is also no doubt, in my view that there was too many so called hedge funds around these last 3 to 5 years and that not all of them deserved our attention as investors and their 2 and 20.
If something good must come out of this crisis, it is most certainly the fact that, at least for a while, investors will focus again on Hubris and Greed, and will pay a lot more attention to the "how" returns are achieved rather than the "how much".
One of the paradox (among many others) in the current environment, is that Banks have failed to finance the "real" economy and have left a large share of this role to Hedge Funds (e.g. ABL or other related strategies), and that regulators and governments around the world have forgotten that in a growing risk adverse environment the need for "conscious" risk takers is even more important, hence they try to save whatever they can save in a corrupted banking world and are stigmatizing hedge funds.
Now, going back to the initial question, I personally do not think that hedge funds are doomed, but that the industry will shine again, probably as soon as the third quarter of 2009, of course the number of hedge funds will be reduced, and most of the survivors as well as the new ones will become more "institutionalized".
I hope that we will see an increase in quality, but it will probably remain as difficult as ever to assess who are the good ones and the bad ones. Expecting an increase in quality is wishful thinking.
Another two cents, unleveraged and not "structured"....