Expert Predicts Shrinkage Of Hedge Fund Numbers

by Phillip Morton, Investors Offshore.com

28 September 2005

The head of Citigroup's hedge fund unit has predicted that will be a certain amount of blood-letting in the hedge fund industry over the coming years as leaner returns and cost pressures force out many underperforming funds and polarise the hedge industry between very large players and smaller specialist boutiques.

Tanya Styblo Beder, chief executive of Tribeca, Citigroup's single manager proprietary hedge fund unit, predicts that the total number of hedge funds will shrink to about 5,000 over the next five years, down from the current level of 8,000, as a "bifurcation in capacity" takes place, according to a Reuters report.

"Such a decrease will stem from rising cost structures as you will need a lot of scale to survive," she told an audience at a symposium held by the Information Management Network on high-performance investing.

According to Styblo Beder, the future world of hedge funds will be polarised between boutiques specialising in trades linked to catastrophic events, insurance derivatives and credit arbitrage, and very large hedge funds, which will focus on multi-investment strategies.

"The nature of market trends is changing and it will become increasingly difficult to survive. Three years ago trends were months long and slow moving. Now the top 10 to 20 trends tend to be less than four weeks and most of the money is made in the first 72 hours - how do you trade that?" she asked.

The fact that so many hedge fund traders are now chasing the same opportunities, making the market less volatile and harder to profit from, is also expected to squeeze out many hedge funds in the coming years. Styblo Beder observed that these pressures have become a factor in statistical arbitrage, which seeks to profit from small price inefficiencies, and global macro strategies, which seek to ride longer-term economic trends.

However, she refuted the suggestion from the more pessimistic analysts that the hedge fund flame is showing signs of burning out.

"I don't think the party is over. I just don't believe that there will be markets with very high returns for long," she stated.

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