Hedge funds face up to dismal returns

["Ulhas Joglekar" <joglekarulhas@xxxxxxxxxxx>]

The Economic Times

Thursday, March 28, 2002

Hedge funds face up to dismal returns

REUTERS

LONDON: After months of dismal returns, hedge funds are coming down to
earth,
finding it harder to raise money and make money, bankers say.

Swashbuckling hedge fund managers, who often boast they can deliver
double-digit returns, have produced stellar performances in recent years,
constantly beating mainstream equity indices.

But they too are finding the going increasingly tough as it gets harder to
turn in acceptable returns, with stocks unable to sustain a rally and
interest rates mired near multi-year lows. The average hedge fund lost money
in February and lagged the blue-chip Dow Jones index after January's 50
basis point return.

Low returns, coupled with an unabated growth in startups, is increasing the
pressure for consolidation in an industry where launches surged five-fold in
2001's last quarter over the first.

"I think we're going to see a lot of hedge funds in Europe disappear because
of failure to reach critical mass. We're going to see a significant number
of hedge funds close or merge and consolidate," said Nick Wilson, head of
the European prime brokerage business at U.S. investment bank Lehman
Brothers.

"Even though there is a significant increase in money coming into the
industry, the number of players competing for it has grown also. The
environment is much more difficult today than it has been in previous months
to raise money," he told Reuters.

Industry data point to the start of consolidation. Money flows to European
startups fell in 2001 despite a 50 percent jump in their numbers. Their
average asset size shrank to $45 million from $70 million in 2000, while
industry trackers Eurohedge predict the figure will dip to $25 million in
2002.

Going forward, bankers say hedge funds will be fewer, bigger and more
institutionalised - something that goes against the grain of these mostly
unregulated pools of capital that make high-stake bets in stocks, bonds and
currencies.

"Boutique hedge funds may simply not be able to provide client servicing
that big institutions expect," said Joanna Monroe, alternative investments
head at AXA Investment Managers.

Hedge funds must be small, light and fast to make money out of market
inefficiencies before other investors notice them. "If we get too big, we'll
be like super-tankers," said one insider.Small was beautiful when the market
was a cottage industry run by a few hundred managers.

But 6,000 funds and $550 billion of assets later, pressure is on for
transparency and scrutiny. "Without at least a lukewarm acceptance of these
requirements, the hedge fund market will remain the confines of the high net
worth individual and a selected small institutional client base," said Ross
Ellis, vice-president for alternative investment managers at SEI
Investments.

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