Super-size hedge funds spark concern

 

LONDON – The hedge fund industry’s
strong rebound from the credit crisis has prompted investors to ask whether
some funds have grown too large and inflexible to keep delivering bumper
returns for which the sector is famous.

The growth of big funds — helped
by strong returns during the credit crisis and some clients’ belief that risks
are lower than in start-ups — helped push industry assets to $1.92 trillion at
end-December, close to the all-time high in 2008, according to Hedge Fund
Research.

However, with the growth of big
funds has come the old question of whether they could be stuck if another
crisis hits, whether liquidity forces them into less profitable markets and
whether their prized trade ideas will be discovered by rivals.

“By definition a supertanker
can’t be as nimble as a speedboat,” said Ken Kinsey-Quick, fund of hedge
fund manager at Thames River, part of F&C, who prefers to invest in funds
below $1 billion in size.

“They won’t be able to respond
to market conditions, especially as markets become illiquid. They can’t get
access to smaller opportunities, for example a new hot IPO coming out of an
investment bank — if everyone wants it then you’ll only get a few million dollars
(worth).”

Funds betting on bonds and
currencies, and CTAS — which play futures markets — in particular have grown
strongly.

Brevan Howard’s Master fund, which
is shut to new clients, has grown to $25 billion after gaining around 20 per cent
in 2008 and 2009, while Man Group’s computer-driven AHL fund is now $23.6
billion, helped by a 33 per cent return in 2008.

Meanwhile, Bluecrest’s Bluetrend
fund, which has temporarily shut to new investors in the past, has nearly
tripled in size since the end of 2007 to $8.9 billion after a 43 per cent gain
in 2008.

And Louis Bacon’s global macro firm
Moore Capital has grown to $15 billion after a good credit crisis.

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