Hedge Fund Back

Hedge Funds Back

Is the Hedge Fund Industry Coming Back?

Hedge funds are back but with a bit less weight to throw around. The publication BreakingViews finds that hedge funds are back on the up and up but a number of adverse factors--losses, redemptions and the credit crunch's lowering of leverage--have combined to cut down the power hedge funds once held. However, this can be viewed as a good thing for the industry as "trades are less crowded and more profitable."

The publication figures that global hedge funds AUM was about $2 trillion in June 2008 with funds typically borrowing $4 to every $1 of investor money, making the industry's "firepower" near $10 trillion. Today, however, that "firepower" has fallen by over 70% to under $3 trillion, with leverage-to-investor cash ratio of $1-to-$1.

Fast forward nine months to what looks like the trough last March, and hedge funds managed some $1.3 trillion. Leverage seems to be down to perhaps $1 for every $1 of investor money, according to Wall Street prime brokers. So the total investment by hedge funds has plunged more than 70 percent, to less than $3 trillion.

Crowded trades were one problem hedge funds faced before the credit crisis, Breakingviews says. Funds that specialize in exploiting inefficiency in the market for convertible bonds, for example, had an uninspired 2007 and a particularly bad 2008. Market moves didn’t help, but overcrowding also led to a dearth of real arbitrage opportunities.

Sharply reduced hedge fund firepower helps explain why this problem has waned, according to Breakingviews. Convertible arbitrage funds are up 24 percent so far this year, according to Credit Suisse/Tremont, against returns of 7 percent for the typical hedge fund and 3 percent for Standard & Poor’s 500-stock index. Moves in debt and equity markets played a big part, but there have once again been mispricings to exploit and fewer dollars chasing them, Breakingviews says.


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