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Breakingviews: Hedge fund stars stand out from the crowd

Source: www.breakingviews.com is Europe's leading financial commentary service

Date: August 2003

By Christopher Hughes

The hedge fund industry is maturing. Many of the start-ups that opened for business during the bear market are closing. These were typically the creations of proprietary traders who had fallen victim to investment banking cutbacks. And they were followed by institutional fund managers keen to demonstrate their stock-picking skills in a bear market.

In 2003, there have been far fewer such start-ups. But they are no less of a threat to established players. Indeed, the third generation of new entrants - established by star hedge fund managers going independent - is in some ways more of a challenge.

There are thousands more hedge funds than there were three years ago. But only a few have the reputation or performance record that will prompt investors to stump up significant capital. The effects of this shortage of good fund managers are exacerbated by the natural limits on the size of any one fund. A fund specializing in, say, mid-sized European stocks will not want to increase its holdings in companies much higher than 4%. If it did, it would find it hard to liquidate positions rapidly.

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