Hedge Fund Demand Now Too Great For Best Returns

by Philip Morton, InvestorsOffshore, London

29 May 2001

Commentators have been predicting for some time now that the sudden discovery of hedge funds by the mass of investors, and the consequent flood of money into the sector will cause it to lose the very merit that has attracted attention: the ability to direct funds in a highly targeted way at carefully selected opportunities that are not obvious to everyone.

Now, according to Goldman Sachs' European Hedge Fund Symposium Investors' Survey, a lack of good hedge fund managers, as well as the exponential growth in demand for absolute returns, is leading 66% of investors to put money into unproven new funds.

Roger Denby-Jones, executive director at Goldman Sachs International in London, said that experienced hedge fund investors typically demand a two-year track record before investing in a new fund, or at least negotiate lower fees. Also, the plethora of new funds means that they are having to offer guaranteed top-up allocations to draw in the investors. Historically, most of the best funds used to close to new investors once they hit a target capacity. It is negative to have too much money to invest.

The survey polled 120 hedge fund investors. Only about 30% of them had asked for fee concessions for early investments. "The supply and demand balance has shifted in favour of the managers, rather than the investors," said Denby-Jones. The survey shows that 45% of the respondents believe fees will actually stay the same. "It is the quality of the manager that counts, rather than the strategy," he added.

Global macro and equity market neutral are the top two strategies that 20% and 18% of the respondents, respectively, believe are the most difficult to find good managers for. Global macro involves making leveraged investments on anticipated price movements of global stock markets, interest rates, foreign exchange rates and commodities. Market neutral strategies are designed to be profitable regardless of the overall direction of broad market prices.

The current size of the European market is about $45bn (€52bn); many respondents thought that in just one year this will rise to between $55bn and $64bn, a rise of up to 40%.

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