Experts warn that the sky-high returns from the hedge fund industry will not be here for long, Reuters reports. As the industry gets more crowded, returns will shrink.
Nonetheless, hedge funds will not fade away. On the contrary, managers are looking to come up with new techniques to allocate money and obtain huge returns.
"There are clearly strategies that have been 'arbed' away," said Neil Brown, a Citigroup Alternative Investments managing director. But as he said, out with the old, in with the new [strategies].
"Five years ago, there was no credit default swap (CDS) market, but now it's a $1 trillion market," with heavy involvement by hedge funds, said Brown.
Managers are now moving away from the most usual long-short strategies. For instance, funds, like Mellon HBV Alternative Strategies, are buying Chinese non-performing loans, following the success of those strategies in Germany and parts of Asia. Other hedge funds are creating long-short strategies in real estate, reinsurance, shipping and other less liquid asset classes.
Though investors may be weary over the risks of the new strategies, those strategies can lead to the creation of new markets. "People can come into a market and make a market for structured finance products and provide liquidity," said Brown.
Hedge funds are expected to surpass their current $! Trillion worth, but experts say that the money will gravitate towards the older, more proved strategies. In turn, such a trend could stifle the growth of the new strategies. "Hedge fund investors are pickier and doing more scrutiny," said David Goldstein, a White & Case lawyer who specializes in hedge funds.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.