Hedge funds need to change to survive

A study of hedge funds by KPMG shows that the quality of these investments has been variable and that they have, as yet, been incapable of generating the high double digit returns that investors are led to expect.

Wednesday, October 12th 2005, 6:42AM

It says two of the biggest problems with hedge funds are poor returns and mispricing of complex products.

While it is an international study KPMG partner Bill Wilkinson “the results for New Zealand were very similar to those in the global survey”.

The study 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 United States 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.

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.

“Hedge funds are, thus, no longer the only means of achieving high absolute returns in today’s low volatility environment,” KPMG says. “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,” Wilkinson says.

The study predicts 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.

The study says that if hedge funds are to retain their current uniqueness, their managers will constantly have to invent new ways of generating high returns.

“Those who do not, may either pale into the emerging mosaic or become victims of the creative destruction which they sparked off in the first place.”

« Task Force member exits financial planning

Sovereign takes regulation bull by the horns »

Special Offers