From Bad To Worse For Hedge Fund Industry in 2009

Those who were expecting an improvement in the hedge fund industry after last year's drubbing are likely in for a disappointment.

A recent article in the Financial Times (link below) published some pretty somber data for the hedge fund industry as it tries to recover from its worst year ever.

The article cites a recent survey of investors by Deutsche Bank.

Of the investors surveyed, a third expect more than $200 billion dollars to be withdrawn from the hedge fund industry in 2009. This would represent a staggering sum of money for an already reeling industry, and a jump from the $155 billion dollars that was pulled out last year.

The article goes on to say that "most" investors expect that at least 20% of all hedge funds will shutter their doors this year.

Also, things are looking to get much tougher for hedge fund managers, as the investors that were surveyed are demanding "better transparency" and are "rating risk management as more important than a manager's pedigree".

I guess the days of shipping eight-figure sums to your favorite hedge fund manager and not being told about what you are investing or trading in are drawing to a close.

In the wake of Bernard Madoff and other hedge fund swindlers that have stolen billions of dollars, investors simply don't trust these companies anymore. Some investors are even running background checks on the firms and fund managers that they are thinking about investing in.

This, of course, makes perfect sense. Why would you run a background check on a potential employee, but not on a company that is managing millions of dollars of your money?

This is going to be an interesting couple of years for the hedge fund industry. I am very curious to see how many hedge funds are still in operation 3-5 years from now.

When you combine a spike in investor withdrawals with increased costs to make the funds transparent to investors, an uncertain market and high water marks that are seemingly miles away, I wouldn't be surprised if many previously successful hedge fund managers just shutter their companies and walk away into the sunset. On top of that, you are likely going to have increased regulations on the industry from the government in the near future, as well as a continued disdain of the industry from the general public. I wouldn't be surprised if many fund managers gave the one-fingered salute to the industry over the next few years, and simply faded away.

The hedge fund industry will certainly survive this downturn. However, at the same time, the industry will never be the same again, and will certainly be hard-pressed to return to the "glory" days of just a few years ago.

Source: FT.com - Fears of Record Hedge Fund Withdrawals

Filed under: Hedge Fund News