Hedge Fund Assets Expected To Contract in 2009

The already under siege hedge fund industry is likely headed towards more pain in 2009, Morgan Stanley analyst Huw van Steenis warns.

The hedge fund industry, which lost a reported $600 billion dollars worth of total assets in 2008 due to losses and withdrawals, could drop another $450 billion dollars in 2009.

Prior to 2008, the hedge fund industry was flush with cash. The industry as a whole had a reported $1.8 trillion dollars under management - many funds closed their funds to new capital, as many investors were literally begging to invest in some of the bigger funds. The first 7 years of the new millennium were a glorious time for hedge fund managers. The blueprint for success was simple - leave a high-profile job at a major brokerage, start your own hedge fund, and become a billionaire within a couple of years.

Things have changed, and many hedge fund managers are now trolling for new capital. $1.8 trillion dollars become $1.2 trillion dollars by the end of 2008 - now, Huw van Steenis is predicting that the industry may be left managing just $750 by the end of 2009. This would mark the lowest level of assets under management for the industry since 2002.

There are a number of reasons why hedge fund assets are expected to continue to shrink in 2009. They are:

1. Expected continued losses in the markets.

2. More investor withdrawals.

3. The Madoff scandal, which will have some people thinking twice about their investments.

4. Relaxed redemption rules at many hedge funds in order to maintain investor confidence, which will likely lead to a great deal of assets headed out the door over the short-term.

Not only that, but the hedge fund industry is also very likely going to be subjected to much stricter regulations over the next couple of years.

This is definitely not a fun time to be a hedge fund manager.

Filed under: Hedge Fund News