Hedge funds may have prospered from a move to absolute returns in recent years but strong performance figures are no guarantee they will continue to benefit argues Goldman Sachs managing director Gary Black.
Black, who is also global chief investment officer for fundamental equities and fixed income, says hedge funds have performed well on the back of market momentum by selling losers and buying winners.
“In 1999 and 2000 there were huge variations in valuations and big opportunities to sell losers and buy winners which created value, but if you take a look at the survivor ratio it wasn’t a completely successful strategy.”
“Every year the bottom 15 per cent of hedge fund managers disappear, so the bad ones don’t survive, but these are not good statistics for any industry.”
According to Black, hedge funds will come under closer scrutiny due to their rapid growth and lack of regulation as well as short term records in retail markets.
“Anyone can roll out a hedge fund as there is little oversight and they are not highly regulated and we can expect a regulatory crack down if a few of them blow up,” Black says.
“I am concerned this will occur as entry barriers are low and there is no conformity in disclosure.”
Black’s comments were part of his presentation at theInvestment and Financial Services Association(IFSA) conference in Cairns, and he says hedge funds are facing a potential bubble akin to the tech boom of the late 90s.
“They have strayed beyond what they were hired to do and many need people who are disciplined about risk control. A real concern is their small scale and if they all worked to the same standards that would be fine but it doesn’t happen that way,” Black says.
“If you remember the tech bubble everyone said it was different this time round and there was no need to be concerned but I am concerned that if things go wrong in the sector there will be a regulatory crackdown.”
Black’s comments received support from the conference’s other main international speaker,Credit Suisse Asset Managementglobal chief executive Michael Kenneally who says running a hedge funds management group is not as easy as it appears despite the low barriers to entry.
“They are easy to start up, and there have been a number of people who have left large managers to do so, but they have capacity constraints and in many cases returns have been much lower than predicted,” Kenneally says.
“These funds have attracted huge inflows and as such there is increasing pressure for them to return the double digit returns associated with them.”
While Kenneally says the funds are complex and have less transparency than other managed funds, he says they are not facing a bubble but rather they would drift away in importance and size over time.
“In the US we have already seen a number of people return to more traditional funds management after setting up hedge funds and these new ventures were easy to do in a bull market but as markets decline many new players will fall out and the quality ones should remain.”
