The following is a guest post by TraderMark of Fund My Mutual Fund. His blog focuses on economic, market, and stock specific ideas - he is running a mock mutual fund with his investment ideas outlined in transparent fashion with hopes of attracting readers to help launch a real mutual fund in the future.
Bloomberg: Hedge Fund Asset Fall Below $1 Trillion; Consolidation Coming
The case of the incredibly shrinking hedge fund asset base continues - from a peak of $1.9 Trillion in May 2008, we're now down to below $1 Trillion. I'd love to know the last time assets were below $1 Trillion. In my November 2008 Roadmap/Thoughts piece I wrote
#4 Hedge Funds/Investing - As stated already I expect at least 1/3rd of hedge funds to be gone either by choice or by their investors decision within a year.
- Hedge-fund investors withdrew $74 billion in January as the economy worsened and equity markets fell, according to a report from TrimTabs Investment Research. The withdrawals were the second highest on record, after $117 billion of outflows in December, the Sausalito, California- based firm said. Investors have pulled $315.6 billion from hedge funds since September, according to data compiled by TrimTabs.
- Investment losses and redemptions reduced hedge-fund assets to $964 billion as of Jan. 31 from $1.9 trillion in May, TrimTabs said. Customers removed money from 13 of 14 fund categories, led by $20 billion in outflows from those that invest in companies going through events such as takeovers.
- Hedge funds are looking to consolidate after record investment losses and customer withdrawals cut assets by 37 percent in the second half of 2008, squeezing their main source of fees. As many as 40 percent of the 9,000 hedge funds and funds of funds may disappear in the next two years, according to Karamvir Gosal, a New York-based investment banker at Jefferies Putnam Lovell.
- While some will return money to investors and shut their doors, mergers and acquisitions will be more prevalent than in the past.
- “The entire industry is under tremendous pressure to improve performance, reduce costs and manage the downturn,” Axiom’s Syed said. “The main problem is finding quality fund managers who have a demonstrable edge.”
- Hedge funds haven’t traditionally been involved in M&A because many managers enjoyed the independence of running their own businesses as fees rose along with client assets, according to James Abbott, a partner at New York-based law firm Seward & Kissel LLP, whose clients include 400 hedge-fund firms. “Many had made the decision to leave bigger organizations to run smaller businesses in the first place,” he said. “The attraction to merge with others just wasn’t there as many funds were doing so well or at least generating a mediocre performance.”
- “The nature of the transactions is going to change this year,” said Elizabeth Nesvold, managing partner at Silver Lane. “Many combinations will be based on the need for survival. There’s a complete reversal in attitude. Some managers who had no interest whatsoever in having conversations with anyone else a year ago have been so humbled by this market environment that they’re willing to consider talking now.”
- Smaller funds, with $1 billion or less in assets, are in trouble, said Jefferies’ Gosal. “They need to ask if the business model is sustainable without performance fees. Many will find it challenging to operate profitably.”
- James Pallotta and Christopher Pia, hedge-fund managers who recently struck out on their own, are discovering just how much the global financial crisis is reducing investors’ appetite for risk.
- Pallotta, who split from Tudor Investment Corp. last month, and Pia, who spent 13 years managing money for Moore Capital Management LLC, probably will raise about $500 million apiece this year, according to brokers who provide loans and administrative services to hedge funds.
- Whether it’s a big-name manager like Boston-based Pallotta or a newcomer, that threshold will be harder to cross this year than in the boom of 2002 through 2007. “The days of the multibillion-dollar mega-launches are over,” said Larry Chiarello, director of research at Red Bank, New Jersey-based Riverview Alternative Advisors LLC, which farms out money to hedge funds.
- The record for $1 billion-plus fund startups was set in 2005, when 13 managers pulled in a combined $19 billion, according to Morgan Stanley.