Hedge Funds Industry Changes

Changes for New Hedge Funds in 2009

The hedge fund industry has obviously gone through some changes after the financial crisis and that change seems to be in the form of smaller and more economical. There is also a lot less of hedge funds opening, with only about a tenth of the 2,000 hedge funds launched in 2005 expected this year.

Hedge funds are drawing investors because limited partners recognize the enormous potential through buying up distressed investments including: "debt, asset-backed securities, and investments taking advantage of the government's Term Asset-Backed Securities Loan Facility (TALF)." Tom Kreitler of C.P. Eaton Partners explains for funds can capitalize on the market conditions, "Markets are extremely mispriced and inefficient in many areas. There has also been a large reduction in the number of funds; and proprietary trading at the old investment banks, which took out a lot of investment opportunities, has almost ended. Any strategy that uses some asset mix of equities, debt or currencies could succeed given the current dislocation."

Although more hedge funds are being launched recently, it is still only a small percentage of the funds that were opened only a few years back. But that can be beneficial to the industry because it has been so overcrowded with new hedge funds. These new funds often failed because they were led by inexperienced and inefficient managers. Today, limited partners are more demanding of their managers and less willing to give away capital to untested GPs. This makes fundraising a more difficult job and even experienced managers raise smaller funds than they would have a few years ago.

Funds are also trying to cut costs on everything that does not have to be directly managed by the staff. Outsourcing operation duties to outside firms is expected to be more popular with new hedge funds. New hedge funds can also expect to face a more involved and scrutinizing investor after the scandals that have troubled the industry. Limited partners are less likely to invest with inexperienced managers. "We're seeing established managers launch additional funds on top of those they already run. We're also seeing well-known managers from established shops strike out on their own" says Harold Yoon of ING Investment Management's fund of funds. Yoon also notes, "Managers are being asked about whether they've been sued before, their trading backgrounds, and what businesses they've run. It sounds mundane, but people who defrauded investors were accused of similar shady behavior in the past." (Source)

Other challenges facing new hedge funds are the threat of new tougher regulation, limited partners pushing for lower fees, and demands from investors and regulators about the fund's liquidity.

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