| Rafik Patel, of FSP Search, in conversation with | | | | not want to take the responsibility for fund |
| James Cullen about the growth in the hedge fund | | | | selection (as is often the case with institutional |
| industry. | | | | investors), funds of funds are basically the only |
| Q1: As an introduction, can you give us a broad | | | | available alternative. |
| brush description of the hedge fund universe? | | | | Q5: In relation to single-manager funds, the fund's |
| The hedge fund industry consists of around 6,000 | | | | manager has total trading authority. It has been |
| funds globally, and manages around $900 billion in | | | | inferred that using a single manager can lead to a |
| assets. Many hedge funds are relatively young | | | | lack of diversification and higher risk. From an |
| (less than five years old) and relatively small (less | | | | empirical point of view, do these inferences have |
| than $25 million under management), which | | | | any validity? |
| emphasises the fact that hedge funds have only | | | | Yes. Individual hedge funds have a high degree of |
| recently become popular with more mainstream | | | | idiosyncratic risk because you are basically building |
| investors. | | | | on the ideas of just one or two people. In |
| Q2: We understand that the hedge fund market is | | | | addition, about 15 per cent of all hedge funds |
| no longer the special province of US-based | | | | closes every year, because of lack of size or lack |
| operators, and that other areas - notably Asia | | | | of performance. This makes it is almost a |
| and Europe - have seen amazing growth in terms | | | | necessity to hold a portfolio of funds instead of a |
| of asset size and startups over the last five | | | | single fund. |
| years. How has this happened? | | | | Q6: With thousands of hedge funds to choose |
| This is primarily a matter of supply and demand. | | | | from, each claiming to have an "edge", where |
| With strong investor demand and no signs of | | | | does the novice investor start? |
| fees coming down, it simply makes a lot of sense | | | | The novice investor should not try to do the fund |
| for experienced portfolio managers, proprietary | | | | selection him- or herself. The whole due diligence |
| traders, marketer, etc, to start up a hedge fund | | | | process and the portfolio building that comes |
| operation. With an average fee of 2 per cent flat | | | | afterwards is just far too complex for DIY. |
| plus 20 per cent of the profit, these people can | | | | Q7: Pension funds and hedge funds - will the twain |
| do a lot better on their own than working for a | | | | ever meet? |
| large bank or asset manager, even if they | | | | Yes, because pension funds tend to imitate each |
| manage to raise only $100 million or so. | | | | other. If the big ones go for hedge funds, the |
| Q3: Given the sort of exponential growth we've | | | | smaller ones will follow. With interest rates at a |
| been talking about, is there a likelihood that | | | | historical low, uncertainty about the future of the |
| returns will be driven down as hedge funds are | | | | stock market, and institutional investors eagerly |
| flooded with capital? After all, it is the role of | | | | looking for something to make up for recent |
| managers and arbitrageurs to normalise and | | | | losses (or to be seen doing at least something), |
| provide liquidity to the marketplace? | | | | hedge funds have been welcomed with open |
| It is clear that the heydays of hedge funds are a | | | | arms by the top pension funds. It is only a matter |
| thing of the past - every succeeding year having | | | | of time before many smaller funds follow suit. |
| shown a worse performance than the previous | | | | The only thing that can prevent this is lack of |
| one. Much depends on the specific strategy | | | | performance. Hedge funds need to convince |
| followed, though. Global macro funds will probably | | | | pension funds that they are worth the hassle and |
| last longest, as many of them operate in liquid | | | | the relatively high fees. If performance stays out, |
| markets. More specialised funds, such as | | | | however, the hedge fund idea will become harder |
| convertible arbitrage, are already suffering. There | | | | and harder to sell. |
| just aren't enough convertibles in the world to | | | | Q8: How are investments in hedge funds affected |
| support the assets under management by this | | | | by current market conditions? |
| type of funds. | | | | Much of the interest in hedge funds is driven by a |
| Q4: Is it fair to say that the European theatre is | | | | lack of alternatives. Many investors do not know |
| best suited to the single-manager fund operation? | | | | where to put their money and are struggling to |
| No. Most European investors use funds of funds, | | | | recover from serious losses in the stock market. |
| that is multi-manager funds. For investors who do | | | | They are therefore very much open to |
| not have the necessary skills to select funds | | | | alternatives at the moment. It is exactly at that |
| themselves, who do not have the size to allow | | | | point that hedge fund marketers start knocking |
| them to select their own funds, or who just do | | | | on your door. What do you expect? |