Life after death for hedge funds?

06 Nov 2008

Several pundits have recently pronounced the so-called “hedge fund model” to be dead (or at least “upended“).  But is the patient clinically dead, or is it just having an out-of-body experience?  After the recent trauma experienced by the sector, hedge fund administrators will likely play a central role in bringing the industry back from the other side.

Hans Hufschmid, the CEO of GlobeOp, one of the world’s biggest hedge fund administrators, recently told the FT that:

“There will be tremendous trading opportunities. We are seeing opportunities that we haven’t seen in our lifetime, just in terms of relative trading let alone directional…

“Convertible bonds are extremely cheap, there are mortgages that are extremely cheap and distressed assets that are extremely cheap. There are lots of opportunities that are ideal for hedge funds to take advantage of.

“Further, hedge funds will face less competition with investment bank proprietary trading desks largely disappearing from the market.”

In its coverage of VW-gate, CityWire also sees life after death for the hedge fund industry:

“…despite the indignant outrage, there are still compelling arguments for the existence of short sellers, arguments about the efficient operation of markets and allocation of capital. And, indeed, over many years hedge fund managers have proved themselves far more adept at spotting early market trends than their long-only counterparts.”

Infovest 21 reports on the dramatic lifestyle changes required if the hedge fund industry is going to prevent another heart attack:

“Hedge fund businesses will have to adjust to new realities as radical changes occur in the way the hedge fund industry does business e.g. the way it allocates and raises funds.”

And FT Advisor recently ran an Op-Ed titled: “Absolute returns funds should not be abandoned”

Even regulators have shown some sympathy toward the industry recently.  Hector Sants, the head of the UK’s Financial Service Authority delivered a speech to a hedge fund conference recently, in which he expressed his heart-felt condolences:

“We recognise that this has been a difficult year for you and we have, sadly, seen some fund failures during this period.”

Meanwhile, emergency room technicians at AIMA redoubled their efforts to save the industry from going under.  In an open letter to members last month, the organization administered the paddles in order to help resuscitate the patient:

“We will resist unsubstantiated accusations of market abuse leveled at the hedge fund industry; where accusations still stand we call for evidence of market abuse to be presented in the interests of regulatory and market transparency.”

Translation: “Clear!…”

But wait…There may be a pulse after all!  Amazingly, given the negative press surrounding hedge funds this fall, Infovest21‘s October Investor Sentiment Survey reveals that 16% of hedge fund investors plan to increase their hedge fund allocations “significantly” while 28% said they would increase hedge fund allocations “slightly”.  Another 44% said they didn’t plan to change their allocations at all.

Hedge funds reincarnated as popular investments that most people actually understand?  It’s a miracle that Shirley Maclaine will be discussing on Larry King Live for years to come…

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  1. Peter M.
    November 7, 2008 at 2:41 pm

    The expression “tremendous trading opportunities” is a perfect illustration why the hedge fund industry has entered / is about to enter a confidence crisis. It is a prime example of what is called “overconfidence” or then a very nice illustration of a “heuristics” with potentially disasterous consequences.

  2. Denise Shull M.A.
    November 10, 2008 at 9:49 am

    “tremendous trading opportunities” – Clearly with the intra-day volatility we have had in the past 15 months there are indeed tremendous trading opportunities.

    Of course profiting from this takes a special set of skills that aren’t easily “duplicatable” and not just anyone can run a hedge fund based on a high-frequency, short term trading strategy. Nevertheless, those skills absolutely (no pun intended) do exist and certain funds and CME members execute them exceptionally well – year after year after year.

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