An Annus Horribilis, But Not the End
Bill McIntosh
To hear the predictions making the rounds, one could be forgiven for believing that the end is nigh for hedge funds. Not a day has gone by recently without further bad news being heaped on the difficult events of 2008 – a year that will go down in history as the hedge fund industry’s annus horribilis.
Already the industry’s once estimated $2 trillion in assets under management has shrunk by 25%, perhaps more, owing to the combined impact of redemptions and drawdowns. Worse still for many investors, a wide number of managers, including some industry giants like Citadel and GLG Partners, have had to invoke temporary suspensions on redemptions.
There is no mistaking the fact that the hedge fund business model in terms of fees, regulation, administration and much else is under pressure. Perhaps the relative quiet in early 2009 is just a lull before heavy storms break out yet again, washing more managers onto the rocks.
Yet given how much bad news has emerged it has to be a possibility that the worst – albeit with some remaining aftershocks to come – may be past. Two unrelated pieces of research suggest that this view has some merit.
The first, I’ll call the apocalyptic reverse leading indicator or, in this case, the forecasting straw that breaks the (hedge fund) camel’s back. It comes in the form of a recent research note from Robert McAdie, global head of credit strategy, at Barclays Capital who forecasts additional years of deleveraging by both consumers and firms across the financial services sector. It means the end result will be a 70%-80% reduction in the size of the hedge fund industry. My own calculations suggest that this might leave somewhere south of $500 billion in AUM.
It’s possible, after all, that BarCap’s forecast is right on the money. But it is worth pointing out that most other forecasts put the total peak to trough shrinkage in the hedge fund space at about 50%, leaving the industry with AUM of roughly $1 trillion. This is the scenario depicted by Huw van Steenis, Morgan Stanley’s head of banks and financials research.
If neither scenario will set pulses racing, it is clear that the latter is rather more palatable. It could also be the more plausible particularly if fund managers show an ability to adapt to the new market realities.
The second research point comes in new reports from Evolution Securities and Credit Suisse on Man Group. Both say the stock, which has more than halved in recent months, has fallen too far. After all, they argue, Man still manages over $60 billion and the resilience of its key businesses, notably AHL, gives it the ballast to survive even the current tough environment.
What this means for the size of the hedge fund industry once the dust settles is a matter of conjecture. But the success of some other big firms – Paulson, Winton Capital and BlueCrest as well as dozens of medium-sized firms – provides grist to argue that AUM won’t fall nearly so far as BarCap’s apocalyptic scenario suggests. How all of this plays out will be a matter of keen interest during 2009.
Already the industry’s once estimated $2 trillion in assets under management has shrunk by 25%, perhaps more, owing to the combined impact of redemptions and drawdowns. Worse still for many investors, a wide number of managers, including some industry giants like Citadel and GLG Partners, have had to invoke temporary suspensions on redemptions.
There is no mistaking the fact that the hedge fund business model in terms of fees, regulation, administration and much else is under pressure. Perhaps the relative quiet in early 2009 is just a lull before heavy storms break out yet again, washing more managers onto the rocks.
Yet given how much bad news has emerged it has to be a possibility that the worst – albeit with some remaining aftershocks to come – may be past. Two unrelated pieces of research suggest that this view has some merit.
The first, I’ll call the apocalyptic reverse leading indicator or, in this case, the forecasting straw that breaks the (hedge fund) camel’s back. It comes in the form of a recent research note from Robert McAdie, global head of credit strategy, at Barclays Capital who forecasts additional years of deleveraging by both consumers and firms across the financial services sector. It means the end result will be a 70%-80% reduction in the size of the hedge fund industry. My own calculations suggest that this might leave somewhere south of $500 billion in AUM.
It’s possible, after all, that BarCap’s forecast is right on the money. But it is worth pointing out that most other forecasts put the total peak to trough shrinkage in the hedge fund space at about 50%, leaving the industry with AUM of roughly $1 trillion. This is the scenario depicted by Huw van Steenis, Morgan Stanley’s head of banks and financials research.
If neither scenario will set pulses racing, it is clear that the latter is rather more palatable. It could also be the more plausible particularly if fund managers show an ability to adapt to the new market realities.
The second research point comes in new reports from Evolution Securities and Credit Suisse on Man Group. Both say the stock, which has more than halved in recent months, has fallen too far. After all, they argue, Man still manages over $60 billion and the resilience of its key businesses, notably AHL, gives it the ballast to survive even the current tough environment.
What this means for the size of the hedge fund industry once the dust settles is a matter of conjecture. But the success of some other big firms – Paulson, Winton Capital and BlueCrest as well as dozens of medium-sized firms – provides grist to argue that AUM won’t fall nearly so far as BarCap’s apocalyptic scenario suggests. How all of this plays out will be a matter of keen interest during 2009.
