Print this article

A wall of money chases hedge funds, despite falling returns

A staff reporter

30 January 2005

The popularity of hedge funds has never been so high and all indications suggest ever greater proportions of portfolios are likely to be allocated to such investments in the coming months. In its annual survey on global hedge funds Goldman Sachs forecasts total assets to grow by 26 per cent in 2002, to a massive $760bn. But the asset class itself is beginning to show less spectacular returns suggesting its popularity could have peaked. The Goldman survey found that respondents across multiple asset classes would increase their relative weightings towards hedge funds at the expense of private equity and traditional asset classes over the rest of the year. Fund of funds, the largest investor group in the survey, expect to show the fastest asset growth in 2002, with a staggering growth forecast of 41 per cent. These investors are in the majority high net-worth investors, not institutions. "Family offices and private investors still provide the bulk of fund of funds assets," according to the survey. The US consultancy Hennessee Hedge Fund Advisory Group predicts a similar explosion in hedge fund popularity. In its fifth annual investor survey, Hennessee found 54 per cent of respondents plan to increase their hedge fund allocation, up from 45 per cent in the 2001 study. Again, fund of funds strategies appear to be flavour of the month, where they made up 15 per cent of hedge fund investments in the survey, compared with just three per cent last year. "Hedge funds' popularity is reaching fever pitch. I'm not sure if we are seeing another investment bubble here, but it's looking ominous," an industry consultant told Private Client Management. Hedge fund mantra Private banks are increasingly being influenced by a hedge fund like mantra. Schroder & Co., recently appointed a major exponent of alternative investment strategies to be its co-chief executive. Sally Tennant was a key deputy to Michael Dobson, ex-head of Deutsche Morgan Grenfell and his Beaumont Capital Management group, which was bought by Schroders in 2001. Tennant recently said at the Private Wealth Forum 2002 in Geneva that hedge funds are the best type of alternative investments for HNWs. Coutts & Co., controls one of the biggest managers of managed hedge funds in the UK, launching Orbita, its first fund of funds alternative investment service, in 1998. Last year Coutts increased its managed client assets in hedge funds and other alternative investments by 58 per cent to $3bn. This figure is expected to be considerably higher by the end of 2002, with Coutts recommending some portfolios contain as much as 20 per cent of alternative investments. "Hedge funds are increasingly being seen as the fourth asset class, after equities, bonds and property," Tim Pethybridge, head of the executive client division at Coutts, told Private Client Management earlier this year. Hedge funds have also captivated Swiss private bankers. Credit Suisse and UBS are selling their clients long/short and other hedge fund strategies in abundance. Smaller banks such as Union Bancaire Privée and Banque Syz, are exposing their clients' portfolios by as much as 30 per cent to the alternative investment category. Across the Atlantic, where more than 80 per cent of hedge funds are sold, private banks and family offices are the major buyers. All the major private bank/client groups are selling their clients hedge funds and demand has never been so strong. Most private banks and wealth managers are responding to this demand by adding expertise in the hedge fund arena. "This is one area where we are seeing private banks looking to recruit, and a considerable amount of the current 'upskilling' in the sector is centred around hedge fund and other alternative investment expertise," Richard Harman, divisional director for wealth management executive search at Sheffield Haworth in London, told Private Client Management. Performance is relative Despite hedge funds growing popularity, their performance so far this year has been far from spectacular. The most widely followed index, the CSFB/Tremont Hedge Fund Index, has showed a paltry 0.71 per cent increase since the beginning of the year , compared with the Dow Jones 3.82 per cent rise. The Dow has outperformed most hedge fund strategies with the exception of emerging markets, which has witnessed a staggeringly high 9.9 per cent rise since the beginning of the year. "Long-only equity investing might be beginning to show a resurgence, after nearly two years of a bear market. If this continues, expect money to flow pretty fast out of hedge funds," noted the industry consultant. Market watchers believe consolidation in the industry is a likely result of any major fund flows away from hedge funds. There has been a proliferation of funds set up over the last few years, as many ex-investment bankers and investment managers take advantage of pent up demand for such products and established funds on their own. Consolidation is likely to benefit the bigger players in the industry, especially the large investment banks. "The dotcom analogy with hedge funds is an apt one. A hedge fund bubble is developing and many of the major beneficiaries of this are small hedge fund companies, like the dotcoms set up in the late 1990s. If this bubble bursts, expect the small guys to be the major victims, with the big banks and investment houses mopping up what's left of the industry afterwards," said the analyst.