|
In association with Hedge Fund Intelligence |
The extraordinary events in global markets over the past few weeks have tested not only the mettle of hedge fund managers, investors and service providers to the limit, but also the creativity of headline writers. And by now you might be thinking all those ‘market-meltdown’ clichés must have been exhausted.
Maybe you should think again – because I have been musing throughout on my own set of clichés, ones that would best and most appropriately describe what has been happening not to markets but to the hedge fund industry in particular during this tumultuous period. I have been pondering clichés like: ‘Shooting the messenger’, ‘Witch hunt’, and, of course, ‘Night of the long knives’.
Although all those clichés might well be true of where hedge funds stand today, there is one I heard recently that I think is coming to sum up the situation for the industry most aptly. And that is ‘Collateral damage’.
The term came up during a discussion I had recently with one of the various people who have been out there doing battle to uphold the industry’s cause with regulators and lawmakers during the recent tumult. While the markets were calm, this source told me, it had been possible to get regulators and legislators to listen to the sound arguments there obviously are for why hedge funds bring positive benefits to the world – such as providing liquidity, cooling overheated markets, exposing corporate frauds and generally enhancing the efficiency of capital flows.
“But when the top priority – maybe the only priority – is salvaging the financial system itself, then most of them suddenly don’t want to listen,” I was told. “Their attitude is: if a few hedge funds go down in the process – even if a lot of hedge funds go down in the process – then so be it. That’s just collateral damage. If the system itself is saved, then that is all that really matters.”
|
“Their attitude is: if a few hedge funds go down in the process, that’s just collateral damage. If the system itself is saved, then that is all that really matters” |
Of course, that sort of attitude is very unfortunate for many in the industry – and it’s completely unfair. And perhaps it is possible to change that type of mindset – if and when the powers that be can eventually come around to the conclusion that hedge funds are not part of the problem but part of the solution. I think that is a battle that can still be won. But, in the meantime, there is a nasty feeling of retribution – even punishment – in the air. Hedge funds have of course generally done well in recent years, and much better than traditional asset managers, both for their investors and of course for themselves. But now it feels uncomfortably like payback time – a chance for the old-established institutional world to take the hedge funds down a peg or two.
In this new world of plunging markets, fearful counterparty relationships and much more expensive leverage, it seems certain that many hedge funds will go out of business – all around the world. Among Asia-Pacific funds, for instance, the number of shutdowns this year was already running ahead of the number of start-ups by the mid-year point, and at least 68 had closed their doors by mid-October. In Europe, the shutdown rate had been slower in the first half despite the difficult conditions – with 53 funds disappearing as against 106 launching – but the attrition rate has been rising fast in Europe too.
With so many funds far away from their high-water marks (which they have to reach in order to earn performance fees) and being hit with redemption requests, the shutdown rate seems certain to spiral.
Nobody yet knows how many funds will ultimately go out of business but it seems quite likely that at least 15% to 20% will go in the near future.
Speaking at the AsiaHedge Forum recently in Hong Kong, Marshall Wace Asset Management co-founder Paul Marshall predicted that perhaps as much as 30% to 40% of the industry will disappear. But then, to a sharp intake of breath from the packed hall, he added: “This is of course great news.”
It is harsh, perhaps. But destruction such as we are witnessing does create opportunity – for those that survive. And what is even better news, Marshall argued, is the likelihood that large-scale competition from the proprietary trading desks of the investment banks is set to disappear too. The end result of all this destruction, he argued, will be a world with much less competition for those who remain – as well as, arguably, more opportunity than there has been for a generation.
During the same week, AsiaHedge held its seventh annual awards event – proving that, despite a subdued mood, a number of big players had still done really well in the region over the past year. These included best management firm award winner Gartmore Japan of Tokyo; the Brevan Howard Asia macro fund and Dragonback multistrategy funds managed out of Hong Kong; and the Artradis Barracuda volatility arbitrage fund, managed out of Singapore, which took the top award for fund of the year.
Within days the $4 billion-plus Artradis group very much proved Marshall’s point – announcing plans for a new $500 million convertible fund, which aims to take advantage of the huge opportunities in the bombed-out CB market, and which the team say they can exploit (initially at least) without any leverage. Whether Artradis will be among the ones best placed to exploit these new opportunities is yet to be proved. But new opportunities are definitely coming. And hedge funds can – and I think will – play a big role in resolving the serious problems of the global markets.
|
|
In association with Hedge Fund Intelligence |
