Half of Hedge Funds Will Not Survive

Nov 11 2008 | 4:50am ET

In one of the more pessimistic portraits of the future of the hedge fund industry, one pension fund investor predicts that half of hedge funds are headed for extinction.

Peter Carey, senior investment officer for alternatives at the $153 billion New York State Common Retirement Fund, says the industry will shrink by as much as 50%, but what’s left of it will present investors with a host of new opportunities.

“There’s going to be a lot less hedge funds in the industry—anywhere from 30% to 50%—and I tend to err on the 50% side,” he said, speaking in front of an audience at the Asset Allocation Forum, sponsored by Catalyst Financial and FINalternatives in New York yesterday. “That’s a healthy development because there’s a lot of folks out there that shouldn’t be in this business, or at least  shouldn’t be charging the fees that they’re charging.”

Along with the steep drop-off of hedge funds, Carey also said fees will decrease in deference to pension fund investors, with more blue-chip shops opening their funds to outside capital and increasing partnership opportunities with distressed managers.

“I really believe as institutions dedicate more dollars to the space, they’re going to take a long, hard look at the long-only book and try to figure out if it’s really adding value or not. They’re going to turn to hedge funds or hedge fund-like structures to address the holes in their portfolios and with that the fee structure is going to come down,” he said.

“What we’re also seeing are unique partnering opportunities from distressed managers that have margin requirements and liquidity constraints coming to us offering deals that I don’t think we’ve ever seen.”

For its own part, Carey said the NYSCRF's hedge fund portfolio is going to cut its fund of funds allocation from 23% to 10% by the end of the year, while increasing its allocation to hedge funds to 45%. The hedge fund portfolio is currently 32% in cash.

“Long-term, these hedge fund programs can protect capital on the downside and get outsized returns on the upside,” he said.


In Depth

Q&A: Brevan Howard’s Charlotte Valeur Talks Strategy

Sep 18 2014 | 11:18am ET

Charlotte Valeur chairs the board of Brevan Howard Credit Catalysts, an LSE listed...

Lifestyle

Hedgies Rock Out For Children's Charity

Sep 15 2014 | 8:40am ET

It's that time of year again—when hedgies trade in their spreadsheets for guitars...

Guest Contributor

Volkered: How Financial Sector Reforms are Creating Opportunities for Hedge Funds

Sep 16 2014 | 11:28am ET

New regulations have dramatically curtailed proprietary trading activity in investment...

 

Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…

 

Futures Magazine

September 2014 Cover

The London Whale: Rogue risk management

Credit default swaps brought down the London Whale and cost JPMorgan $6.2 billion. Here is how it happened.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.