Hedge fund inflows are starting to pick up, and analysts suggest that assets under management will return to their 2008 peak during 2010. Just under $14 billion was allocated to hedge funds in the fourth quarter of 2009 – the largest quarterly inflows since the financial crisis began.
Secondly, the market is looking optimal for hedge funds. Liquidity is back. All but three of the strategies in Hedge Fund Research’s indices pool ended 2009 in positive territory, with the average up just over 20% as liquidity returned.
But the main reason why managers must be relieved is the proposal from US president Barack Obama that hedge funds should be split out of banks. At first glance, this might be seen to be damaging. If banks are not allowed to own hedge funds or invest in them, one source of assets will be lost. But from a different angle the plan looks promising. If banks are no longer allowed to do proprietary trading, a lot fewer parties will be chasing the same trades. And where will those traders go? To hedge funds, causing a resurgence of talent in the industry. And so JPMorgan’s Highbridge and Goldman Sachs Asset Management have to spin out on their own? It’s probably for the best. Clients of the banks must always have been wary of conflicts of interest, and if the businesses are as good as their banking owners claim, they will survive.
And although it might appear that a ban on banks being attached to hedge funds condemns the funds as pernicious, it does the opposite. There is no talk of curbing hedge fund activities. Indeed, it must be obvious to the administration that the plan will probably increase the number of funds. It seems to be saying: you want to earn crazy money and take risks, go do it. Just not with taxpayers’ money.
The only hindrance to the growth that hedge funds are likely to enjoy will be stories of Ponzi schemes and fraud. Regulators have made it clear that more efforts will be made to sniff out fraudsters. The SEC has just announced the formation of five new units in its enforcement division: in its sights are hedge funds, private equity funds, investment advisers and investment companies. That’s good for the industry at large but inevitably there will be pressure on regulators to trumpet even the smallest of fraudsters that they uncover. So fingers crossed, no Madoffs this year.
