Hedge Funds A Booming Market

Rafik Patel, of FSP Search, in an interview with James Cullen about growth in the hedge fund industry.

Q1: As an introduction, you can send us a broad brush description of the hedge funds? 

The hedge fund industry consists of around 6,000 funds worldwide and manages approximately $ 900 billion in assets. Many hedge funds are relatively young (less than five years) and relatively small (less than $ 25 million under management), the fact that hedge funds have only recently become popular with more mainstream investors emphasized.

Q2: We understand that the hedge fund market is no longer the special province of the US-based operators, and other areas - particularly in Asia and Europe - have seen amazing growth active over the past five years in terms of size and startups. How did this happen?

This is mainly a question of supply and demand. With a strong demand from investors and no signs of fees down, it just makes a lot of sense for experienced portfolio managers, proprietary traders, marketer, etc, starting a hedge fund operation. With an average of 2 percent flat fee plus 20 percent of profits, these people do a lot better on their own than working for a large bank or asset, even if they manage to raise only $ 100 million or so.

Q3: Given the kind of exponential growth that we talked about, there is a chance that returns will be driven as hedge funds are awash with capital? After all, it is to normalize the role of managers and arbitrageurs and the liquidity in the market?

It is clear that the heyday of hedge funds are a thing of the past - each following year have shown a worse performance than the previous. Much depends on the specific strategy followed, though. Global macro funds will probably last the longest, as many of them work in liquid markets. More specialized funds, such as convertible arbitrage, are already suffering. There just are not enough convertibles in the world to support under management of such funds. Assets

Q4: Is it fair to say that the European theater is best suited for single-manager fund operation?

No. Most European investors use the funds of funds, which is multi-manager funds. For investors who do not have the skills necessary to select the funds do not have the size to allow them to select their own resources or who simply do not want the responsibility for the selection of funds taking (as is often the case is to have institutional investors), funds of funds are basically the only available alternative.

Q5: In connection with single-manager funds, fund manager has total trading authority. It was concluded that the use of a single manager can lead to a lack of diversification and higher risk. From an empirical point of view, these conclusions have no validity?

Yes. Individual hedge funds have a high degree of idiosyncratic risk, because you actually build on the ideas of just one or two people. Moreover, close about 15 percent of all hedge funds each year for lack of size or lack of performance. This makes it almost a necessity to a portfolio of funds took place in a single fund.

Q6: With thousands of hedge funds to choose from, each claiming that an edge have, where does the novice investor to start from?

The novice investor should not try to do fund selection. Himself or herself The entire due diligence process and portfolio building that comes afterwards is just too complex to do.

Q7: Pension funds and hedge funds - will the twain ever meet? 

Yes, because pension funds tend to imitate each other. If the big ones go for hedge funds, the smaller follow. With interest rates at historically low, uncertainty about the future of the stock market, and institutional investors are eagerly looking forward to make up for recent losses something good (to see or do at least something), hedge funds have been received with open arms by the top pension funds . It is only a matter of time before a large number of smaller funds follow. The only thing that this may occur is the lack of performance. Hedge funds have to convince them that they are worth the hassle and relatively high cost. Their pension If performance remains, but the hedge fund idea will be harder and harder to sell.

Q8: How are investments in hedge funds affected by the current market conditions? 

A large part of the interest in hedge funds is driven by a lack of alternatives. Many investors do not know where they get their money and are struggling to recover from heavy losses in the stock market. They are therefore very open for alternatives at this time. It is precisely at that point that hedge fund marketers start knocking on your door. What do you expect?