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Hedge funds: Opportunities in redemptions

When it comes to retaining clients, hedge funds can’t win at the moment.

Those with good performance are suffering from redemptions as investors are forced to rebalance portfolios as equity investments decline, or to redeem hedge fund allocations simply to free up cash to be put to use elsewhere. In October and November, more than $80 billion left the hedge fund industry. Some private banks, however, say the forced redemptions of some investors are offering opportunities to high-net-worth individuals.

Dennis Geelan, director of investment solutions at Credit Suisse’s private bank in London, says that there are select opportunities. "Many hedge funds have delevered by now and are well incentivized to work even harder to retain investors and get performance back above the high-water mark and make performance fees again." The fact that there are no performance fees to be paid to some managers given the drop off in performance is also viewed as a reason to invest by some opportunistic high-net-worth clients, adds Geelan.

Patrick Reid, director with Citi Global Wealth Management Alternative Investments, says that, for those managers that will not have performance fees this year, it is essential to carry out thorough due diligence. "How are those funds going to retain staff in 2009 and beyond, for example, if incentive fees have gone? Low fees do not equate to a great manager."

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