Hedge Funds A Booming Market

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Rafik Patel of FSP Search chats with James Cullen about the growth of the hedge fund industry.

Q1: By way of introduction, can you give us a general description of the hedge fund universe?

The hedge fund industry has approximately 6,000 funds worldwide and manages assets of approximately $ 900 billion. Many hedge funds are relatively young (less than five years old) and relatively small (under $ 25 million under management), which highlights the fact that hedge funds have become popular only recently by mainstream investors .

Q2: We understand that the hedge fund market is no longer the preferred province of US operators and that other regions – notably Asia and Europe – have experienced incredible growth in asset size and startups in the last five years. How did it happen?

It is mainly a question of supply and demand. With strong investor demand and no sign of lower fees, it makes sense for experienced portfolio managers, proprietary traders, marketers, etc., to launch a hedge fund transaction. With average fees of 2% fixed and 20% of profits, these people can do much better by themselves than working for a large bank or asset manager, even if they manage to raise only 100 million about dollars.

Q3: Given the type of exponential growth we have discussed, is there a probability that returns will fall as hedge funds are flooded with capital? After all, is it the role of managers and arbitrageurs to standardize and provide liquidity to the market?

It is clear that the era of hedge funds is a thing of the past – each successive year having underperformed the previous one. However, it depends a lot on the specific strategy followed. The global macroeconomic funds will probably last the longest, many of them operating in liquid markets. More specialized funds, such as convertible arbitrage, are already suffering. There are simply not enough convertibles in the world to support the assets under management of this type of fund.

Q4: Is it fair to say that European theater is best suited for single manager fund operation?

Most European investors use funds of funds, ie multi-manager funds. For investors who do not have the skills to select the funds themselves, who are not the right size to choose their own funds, or simply do not want to take responsibility for fund selection (such as is often the case for investor institutions), fund of funds is basically the only alternative available.

Q5: For single manager funds, the fund manager has the necessary trading authority. It has been inferred that the use of a single manager may result in a lack of diversification and a higher risk. From an empirical point of view, are these inferences valid?

Yes. Individual hedge funds have a high idiosyncratic risk because they rely heavily on the ideas of one or two people. In addition, around 15% of hedge funds are closed each year due to insufficient size or lack of performance. This makes it almost necessary to hold a portfolio of funds instead of just one fund.

Q6: With a choice of thousands of hedge funds, each claiming to have a "benefit", where does the beginning investor start?

The beginning investor should not try to make the selection of the fund itself. The whole process of due diligence and portfolio construction that follows is far too complex for DIY.

Q7: Pension Funds and Hedge Funds – Will Both Meet One Day?

Yes, because pension funds tend to imitate one another. If the big ones choose hedge funds, the smaller ones will follow. With historically low interest rates, uncertainty about the future of the stock market and institutional investors looking for something to compensate for recent losses (or at least be seen doing something), hedge funds have the best pension funds. It's only a matter of time before many small funds do the same. The only thing that can prevent this is the lack of performance. Hedge funds have to convince the pension funds that they are worth it and the relatively high fees. However, if the performance does not hold, the idea of ​​hedge funds will be increasingly difficult to sell.

Q8: How are investments in hedge funds affected by current market conditions?

Much of the interest generated by hedge funds is motivated by the lack of alternatives. Many investors do not know where to put their money and are struggling to recover from the serious losses in the stock market. They are therefore very open to alternatives for the moment. It's precisely at this point that hedge fund marketers are starting to knock on your door. Qu & # 39; expect?


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