Barclays adds voice to bleak hedge fund outlook
Up to 80% of all hedge funds could disappear in the coming year, while proprietary trading desks will all-but disappear, according to Barclays Capital in one of the bleakest assessments yet for the financial markets.
"We expect a substantial reduction in the size of the hedge fund industry, in the order of 70% to 80%. We believe only those funds with models that operate on near zero leverage will be those left standing," the UK bank said in its report, Global Credit Market Strategic Outlook 2009.
Barclays' prognosis could be the most dire yet made for the $1.56 trillion (€1.2 trillion) industry, which has already lost about $304bn of assets, or 16% of what it managed at the start of the year, thanks to market turmoil and investor redemptions.
Earlier this year data providers Hedge Fund Research said up to 700 funds could close this year, representing a 28% reduction from January numbers. Asset manager GAM estimated nearer 900 could fail by the end of this year.
However knocking out 80% of funds would leave the industry populated by just a few more than existed when prominent fund Long Term Capital Management blew up in 1998, according to HFR.
One consultant said: "Small funds will go first, the ones that cannot survive if they get hit by a large redemption." Explaining the reasons why so many investors have already rushed for the exit, Kenneth Heinz, HFR's president, said: “In a tumultuous flight to quality, investors have looked to liquidate portfolios of any risky assets."
Barclays is not alone in its gloomy outlook. Huw van Steenis, head of banks and financials research for Europe at Morgan Stanley, said recently that by the end of December the industry might manage just $1.1 trillion. Christophe Bernard, managing director at investor Union Bancaire Privee, said in October hedge funds might manage just $1.5bn by the end of March next year. Barely two months after Bernard spoke they were already about 95% of the way there. He added that one-quarter of all managers could close down in the coming 18 months.
However the pared-down hedge fund industry will face at least one fewer competitor, Barclays Capital said. It predicted banks' proprietary trading operations "will effectively cease" as capital is transferred elsewhere in the firms.
A fund manager at a London convertible bond hedge fund said there had already been evidence that proprietary trading desks were scaling back by selling assets they regarded as risky - including convertible bonds - before their firms' next reporting season at the end of the year.
A number of banks have recently shut or curtailed their trading desk activity. Swiss bank Credit Suisse has said it is winding down some of its proprietary trading activities, while French peer Caisse d'Epargne is closing its own down. Calyon is also scaling back its activities while Societe Generale said it would limit the amount its proprietary trading ran.
One investor said: "The crowded trades many hedge funds have been in will not be as crowded without proprietary trading desks in them, too, so it's good news for hedge funds."
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