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Hedge funds see ‘uphill climb’ but optimism remains high - Rothstein Kass survey

Wednesday, July 07, 2010
Opalesque Industry Update – A survey conducted by Rothstein Kass, an international financial services firm, has found that the majority of hedge fund managers expect a “difficult year” for the industry. But they are still optimistic there would be more fund launches in 2010 compared with 2009.

The survey, an annual report on hedge fund trends called "2010 Hedge Fund Outlook: Back to the Future?" that polled 381 senior hedge fund managers between February and April, was released yesterday.

At least 70% of those polled said they “expect 2010 to be a difficult year,” on concerns on tighter regulation, competition and fund-raising, but at the same time see the hedge fund industry steadily recovering.

Howard Altman, co-CEO and co-Managing Principal of Rothstein Kass said: "While nearly 70% of hedge fund professionals we polled still expect 2010 to be a difficult year, there are signs that conditions continue to improve. However, it is clear that the crisis has had a profound impact on the sector and its practices. Stung by fundamental misunderstandings regarding the nature and objectives of hedge fund capital pools, the community has responded by taking steps to offer greater transparency and enhance educational initiatives.”

One-third of hedge funds to raise capital, as redemption expected to slow
In the Rothstein Kass survey, 67% of hedge fund managers said they would raise additional investment capital this year, while 73% expect that redemptions would continue to slow this year.

"In addition, the slower pace of redemptions has alleviated immediate liquidity concerns and restored fund stability, allowing funds to devote more substantial resources to core portfolio management activities and to evaluating operational best practices,” Altman added.

Fund managers also expect larger established fund with proven track record of delivering superior results to attract assets from pensions, endowments and benefit plans.

Highlights of the report
Some of the notable findings of the survey include:
* Nearly 70% of survey participants indicated that hedge fund launches in 2010 will be smaller than before the credit crisis;
* Approximately 71% of hedge funds expect launches in 2010 to be more reliant on seed capital;
* 80% of firms surveyed indicated that hedge funds will use significantly less leverage than prior to the crisis;
* Roughly 58% of respondents anticipate downward pressure on hedge fund fees;
* Nearly 77% expect there will be increased regulation of hedge funds;
* 47% expect the bulk of regulatory changes to take effect this year, with 52% indicating that the changes are more likely to take place in 2011.

General optimism for 2010
On average, the global hedge fund industry returned 20% last year, after losing 19% in 2008.

Hedge funds were also returning positive numbers this year until April, when the HFRI Fund Weighted Composite Index was up 1.29% and 3.79% YTD. But many managers were caught off-guard with the sudden downturn in May. The HFRI Fund Weighted Composite Index went down 2.26% that month (+1.28% YTD).

Hedge fund tracker HFN reported that the industry had lost $66.87bn of its assets from negative performance during the month and that total industry assets fell -2.82% (est.) to $2.234tn..

But some investors are still very optimistic about the industry’s potential.

Financial firm SEB announced it still expects 2010 to be a better year for hedge funds “than a normal year” despite its negative performance in May. The firm said that hedge funds offer top risk/reward across asset classes (See Opalesque Exclusive: here).

This was the same opinion given by HSBC Private Bank when it saidsaid it still had the highest conviction overweight in hedge funds, believing that the industry is well positioned to gain from the current market conditions and higher volatility.
- Precy Dumlao


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