Hedge fund returns questioned

As hedge funds grow in popularity within the Australian market, the managing director of a large US-based hedge fund manager has drawn a number of comparisons between the US$500 billion US industry and the burgeoning Australian hedge fund environment.

Albert Hsu, managing director and chief investment officer of Anchor Point Capital, said that assets invested in US hedge funds increased by 160 per cent since 2002, and estimated a further US$1 trillion will be invested over the next five years.

He also noted that there was a running global debate about whether hedge funds should be defined as an asset class or a strategy, voicing his opinion that they qualify as an asset class.

Hsu said there was considerable concentration of assets in the US market, with roughly 10 per cent of fund managers responsible for 78 per cent of the assets invested with hedge funds, and the top 100 hedge fund managers controlling 54 per cent of assets invested.

The growth of hedge fund investment across retail and institutional markets in Australia was expected to continue as funds seek to harness what Hsu estimates is only 2 per cent of available alpha.

“But can hedge funds generate the returns they need to, due to the dilution of returns with the large numbers of investors flooding into the market?,” Hsu asked.

“The inflow of capital into hedge funds needs to slow down if funds are going to continue to capture alpha.”

He was also extremely interested in the comparatively cautious approach of Australian hedge fund investors.

Referring particularly to institutional investors, who despite understanding the rationale for investing in hedge funds and the need for a minimum exposure of around 10 per cent, rarely achieve this figure.