Hedge funds to shrink by 60% as scandals and downturn batter sector

Date: Tuesday, April 14, 2009
Author: Nathalie Thomas, Scotlandonsunday.com

The controversial hedge fund industry is likely to shrink by 60% as a result of the Bernie Madoff fraud and other recent crises, according to sector insiders.

Analysts predict the sector, which has been particularly hard hit by the financial meltdown, is unlikely to ever fully recover from the recession as hedge funds collapse in their thousands.

Almost 1,500 hedge funds, 15% of the entire industry closed down last year, and industry insiders expect the decline to continue as investors flock to redeem their money in the wake of scandals such as Madoff's giant Ponzi scheme.

Hedge funds are also thought to have suffered heavily from the ban on the short selling of financial stocks, which was lifted by the FSA earlier this year but which could be reintroduced at any time should regulators see fit.

Katie Partridge, director of client relations at Eddington Capital Management, the fund-of-hedge-funds which is part owned by Caledonia Investments, expects the sector is likely to emerge 60% weaker from the recession.

She said the days when fund managers were able to leave large investment banks, set up on their own and attract millions of pounds in investment with relatively little effort were long gone.

"Now investors are approaching it from a completely different angle," she said. "They are doing a lot more due diligence and are taking a lot more time. The (hedge fund] universe is going to shrink, it's shrinking all of the time but it had to happen. There were too many managers chasing the same thing. One of the problems was when investors wanted to redeem, they found some of these businesses were not managed properly. You now really have to demonstrate to investors how you manage your money."

According to Hedge Fund Research, investors withdrew $525bn (£380bn) in the second half of last year.

However, some high profile funds have continued to prosper despite the downturn. Eleven leading fund managers, including George Soros and John Paulson, netted a combined $9.8bn in 2008 by outwitting the rest of the market, according to the trade magazine Alpha.

Partridge said interest was slowly beginning to return to well-managed funds, but investors were taking a lot more time before committing.