UK - The CEO of CREATE, the UK think tank, has launched an attack on worldwide hedge fund managers and their ability to achieve their maximum potential.
Professor Amin Rajan (pictured), CEO of CREATE, described more than half of all managers as “wannabes” who were happy to play it safe with hedge funds.
Rajan also said that one in three managers fell “victim” to the volatile industry.
Rajan, who has presented his research at over 100 major events in the last five years, said: “About 15% of hedge fund managers are stars with a proven track record; but they are unwilling to grow their business substantially for fear of diluting the returns.
“A further 55% are wannabes with the right pedigree; but they are neither tested nor stretched. The rest are the victims of the brutal burn and churn that characterise their industry.”
Rajan spoke out as a new CREATE and KPMG International report predicts that a recent unprecedented surge in demand for hedge funds will ease as the industry commoditises.
Their joint research shows that the hedge funds industry will consolidate over the next three years because of a wide margin of under-utilised capacity, at the manufacturing, distribution and administration end.
For hedge fund managers, consolidation is likely to occur mainly via high attrition since they run life style businesses which are hard to value.
However, for managers of fund of hedge funds it should occur via mergers and acquisitions, and for administrators via acquisitions by global banks diversifying into prime broking and back office services.
The worldwide growth in hedge funds has been fuelled by the prolonged bear market and the inflow of top talent capable of generating high returns.
Their impact has been petering out at the time when the number of start-ups has increased considerably.
The joint CREATE and KPMG report, which presents the views of 550 top executives in 35 countries involved in hedge funds, administration, prime broking, mainstream fund management and pension funds, also found that the quality of the resulting capacity is highly variable.
Most of it is, as yet, incapable of generating the high double digit returns that investors are led to expect. At the front end, the biggest risk is poor returns; at the administration end, it is mispricing of complex products.
The study also predicts that the next wave of new money into hedge funds will come from pension funds that have so far adopted a “wait and see” attitude.
Those in the US are likely to have bigger allocations than their peers in Europe and Asia Pacific because of their superior in-house expertise and oversight controls. Worldwide, allocations will be small: less than 3% of total investments on average.
But the sheer weight of new money should commoditise hedge funds and drive down high charges and fees.
Indeed, the study found that hedge fund managers and mainstream fund managers are already diversifying into one another’s product areas, using similar investment strategies and boutique structures that overtly separate high and low return products.
Tom Brown, co-author of the report and partner at KPMG in the UK, added: “Gaining huge prominence in the bear market, hedge funds will outlast it, as will their top managers.
“As a catalyst, they have started a chain reaction that extends across the global fund management industry. They have forced mainstream fund managers to go back to their time honoured mission to provide absolute returns.”
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