Analysts Cast Gloom Over Prospects For Future Hedge Fund Performace

by Phillip Morton, Investors Offshore.com

24 September 2004

With hedge funds having generally produced, at best, flat returns over the last few months, many analysts and observers believe the recent blip in performance is a sign of a more serious crisis ahead in the hedge fund industry, Reuters reports.

While most of the major hedge fund trackers reported average returns of between 0% and 1% for August, monthly performance since the first quarter of 2004 has generally been moderately negative.

Likening the recent run of poor returns to a “crisis of slow Chinese water torture,” John Prout, senior fund analyst at Monaco-based Eurofinancial Investment Company told Management Network's High-Performance Investing Symposium:

"I don't see performance going into double digits in the next decade. If stocks start going up across the board why stay in hedge funds, you'd go into long-only equities."

Many blame the recent run of negative returns on the trendless equity markets which have made it more difficult for hedge fund managers to catch on to a trend. Around half of the estimated $1 trillion in hedge fund assets is said to be placed in equities.

Josef Naegel, managing director of German-based Athena Risk Advisors, believes the hedge fund industry is storing up problems for the future.

“You’ve got too many people taking a bet on the market,” he told Reuters on the sidelines of the Monaco conference. “It all adds up to a lack of diversity,” he added.

“Liquidity will go down, as volatility goes up, as interest rates go up – it’s a poison pill,” he warned.

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