Monday, November 05, 2007

New Managers Struggle For Funds

Crikey... one doesn't know who to believe these days. We have had reports over the last few weeks suggesting that the hedge fund industry is AOK even with the recent turmoil and that we will see the industry stomping forward despite all the troubles. Today, however, Bloomberg ask "where have the hedge funds gone?" in an article discussing the troubles in start up funds.

New hedge funds, according to data from Hedge Fund Research Inc, are opening at the slowest pace since 2003 with almost all of the $164bn of new investments going to managers with proven track records. Should this be a surprise? Not really.

``People are spooked,'' said Bill Grayson, president of 21- year-old hedge-fund company Falcon Point Capital LLC in San Francisco. ``There is no doubt that a few years ago, if you popped out of brand-name firm,'' everyone wanted to give you money. ``That game is now over.

Personally I think there is a little bit of showmanship going into this statement from Mr Grayson. If I was running a large hedge fund I would be happy to keep the 'spookiness' going and declare to whomever would listen that giving money to new managers 'is over' and very dangerous!

Of course confidence in the $1.8 trillion industry has been shaken by the worst decline in non-government debt markets since Russia defaulted in 1998 and, as an investor, you may want to be a little more careful about who you give your money to. Just like when the tech bubble burst, everyone virtually abandoned the small cap market for the relative safety of blue chips it is, in our opinion, the same here. It wasn't so long ago that the stories of vast profits and huge earnings were the best to sell newspapers and bring visitors to your web site, it is now the horror stories of failure and losses that make the headlines.

``We got really burned by a startup,'' said Louis Morrell, vice president of investments at Wake Forest University in Winston Salem, North Carolina, declining to identify the manager. Wake Forest has about 18 percent of its $1.3 billion endowment in hedge funds. Morrell said he now won't invest in a fund unless it's been open for five years.

About 1,200 funds will be introduced this year, down 20 percent from 2006, Hedge Fund Research estimates. There were about 9,900 funds worldwide at the end of September. The 20 biggest managers control one-third of the industry's assets, according to data compiled by London-based research firm Hedge Fund Intelligence Inc.

This reluctance on the part of investors to deposit funds with start ups will have an affect on the industry, obviously. If you are a young gun at Goldmans and you only have the prospect of getting $20mn to start your fund you are hardly likely to leave your million dollar bonuses to start your own fund that will not attract enough to pay you more.

The point, however, from our perspective, is that the industry itself is becoming more institutionalized and civilized. The big boys have to court pension funds and others and, perhaps, do not have the need for the risk aware high net worth clients of old.

This creates a two teir market...the sophisticated high end institutional funds and those who aren't. Having this distinction is not a bad thing for the smaller managers, they will be more nimble, more free to take more risks and, ultimately be more profitable. Then the cycle will start again, everyone looking for the new hot shot manager creating spectacular returns compared to the boring big boys, who in our opinion, will struggle to give the returns required with the institutions breathing down their necks...

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