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KPMG Predicts Hedge Fund Industry Shake-Out

by Phillip Morton, Investors

09 December 2008

Next year will see the strong return of value investing, a shake out in the hedge funds industry, changes to prime brokerage relationships and the likelihood of more intrusive regulation, according to tax and business advisors KPMG.

“We are already starting to see the more forward-thinking investors focusing their attention and capital on finding undervalued assets and snapping them up for rock bottom prices," said Tom Brown, European Head of Investment Management at KPMG. "This value investing will continue into 2009 and some organisations will make sound returns as a result."

Following several consecutive months of negative returns for alternative investment funds in 2008, Brown envisages that a "massive shake out" will take place in the hedge funds industry in 2009 with many funds struggling to come to terms with heavy losses.

"Many will likely be forced to close out their funds, write to their investors, return the money that is left and call it a day," he predicted. However, he added that this will be in direct contrast to another trend that is likely to emerge in 2009, that of "new blood" entering the industry as talented traders from banks bring their creative ideas to bear.

"Investors will continue to look for alternative investments and smart, bright new upstarts with strong and sensible strategies might just be what is needed to restore confidence and drive investment," Brown said.

KPMG also believes that fund managers will seek more "traditional" relationships with multiple prime brokers in 2009.

“The symbiotic relationship between hedge funds and prime brokers is broken and needs to be fixed. In 2009, prime brokers will likely find managers looking for arrangements that mirror more traditional and secure custody agreements and wanting to spread their risk across multiple providers. Both trends will mean that the profitability of prime broker businesses will be somewhat reduced," he observed.

Another significant change predicted for the investment landscape next year is the prospect of tighter regulation of hedge funds by the financial authorities, particularly in the United Kingdom.

“We would expect to see more intrusive regulation in 2009. Not new or more regulation, necessarily, but rather, managers should expect that the Financial Services Authority (FSA) will actively begin to visit those managers it has not yet seen, visit organisations on a more regular basis in general, and probe more deeply into the business. This, of course, will mean an extra cost burden for managers, but being well prepared and managing these FSA visits effectively is critical to future success," Brown concluded.

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