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.