Hedge Fund Talent Becoming Harder To Find

by Phillip Morton, Investors Offshore.com

14 October 2005

Explosive growth in the hedge fund industry is diluting talent, making it harder for investors to find hedge fund managers with good track records, a hedge fund conference was told earlier this week.

"It's not easy to find talent," observed Peter Fletcher, management director of Swiss-based Parly Company, an investor in hedge funds, at a seminar organised by IRC Conferences.

"We think of hedge funds as predators in the jungle, except these days the prey has been eaten," he added.

Investors have been piling money into hedge funds at a phenomenal pace in recent years, leading to a doubling of assets under management to $1 trillion over a five-year period. At the same time, the number of hedge fund managers has grown to an estimated 8,000 from 4,000 five years ago.

"The average quality is going down," noted Joel Katzman, president and chief executive of JP Morgan Alternative Asset between 1995 and April 2005. He added that in days gone by, one would be comfortable investing with 20% of managers, a ratio which has now decreased to 10%.

However, according to a recent survey by hedge fund advisor Hennessee Group, the vast majority of hedge fund investors are satisfied with the performance of the asset class and intend to increase their allocations, despite the inability of hedge funds to deliver the double digit returns that made them so attractive during the equity bear market. This year, hedge funds are expected to return on average 5% to 7%. This compares to 15% in 2003 and 9.5% last year.

Nonetheless, the survey revealed that 93% of the 94 hedge fund investors polled, which included high net-worth individuals, family offices, endowments, pension funds and funds of hedge funds, intend to maintain or increase the amount of money they have invested in hedge funds, while 91% responded by observing that hedge fund returns have met or exceeded their expectations.

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