
Dollar doldrums and LatAm debt dent confidence
ABN Amro's head of alternative investments, Gary Smith, is cautious on the outlook for hedge funds as the dollar falls and a Latin American debt crisis looms.
Smith said in the past there had been a high correlation between debt problems in emerging markets and fallout in the hedge funds industry, a reference to the collapse of LTCM following the late 1990s' emerging markets crisis.
He added that a weakening dollar was also a negative when many hedge funds were holders of US securities. 'At the moment, we are in a relatively high risk environment,' he said.
Overall, he sees continued rapid growth of the hedge fund market as institutions look at investment vehicles that can boost their profitability at a time when the mutual funds industry's margin is under pressure.
ABN Amro estimates a bond mandate can make an institution 0.2% a year, compared with 1% for a retail equity product, about 1.5% for a fund of hedge funds and as much as 3% for a hedge fund, including performance fees.
Smith believes Europe will see the most rapid growth in hedge funds. Roughly 15% of global hedge fund assets are based here, according to ABN, compared with 80% in the US.
He said: 'Europe is growing more rapidly than the US, but off a very small base.'
While global hedge fund assets total $600bn, he believes this still leaves the industry with plenty of scope for future growth, as the US mutual fund industry is $5 trillion and the US pension fund industry some $8 trillion.
ABN Amro believes there are plenty of risks to institutions looking to develop hedge fund capacity. Crucially, building up a star culture with higher remuneration can cause tensions among the fund management team. Another is the complications that might arise in the investment process. Smith gave the example of a long only fund being overweight in a stock the hedge fund wished to short.
Smith added risk monitoring was essential for liquidity and trading, aspects that were less important for long-only funds.
External risks also exist for a business, Smith said. 'You can have brand contamination if one hedge fund blows up,' he said. 'Some strategies will blow up ' it is just a matter of time, so you need to be careful which one you go into.'
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Hedge funds
JP Morgan warns hedge funds to expect intraday margin calls
US bank may demand variation margin ‘up to seven’ times a day after Archegos default
Alternative markets give edge to Florin Court strategy
By concentrating on exotic and alternative markets, Florin Court Capital Fund has sidestepped overcrowding and correlation to the main trend following commodity trading advisers, offering investors a diversified alternative to the standard systemic macro…
Global macro views combine with quantitative models to produce consistent returns
The team behind River and Mercantile Group’s global macro strategy team operates under two key principles: that macro is the most important aspect of any investment decision and that decision-making should incorporate both systematic and discretionary…
On the offensive – Seeking a new edge, buy-side invests in portfolio and risk analytics
A fast-moving, headstrong hedge fund – hit by rare losses after a black swan event touched on an overweight country exposure – ponders adding fresh quantitative expertise. Much to traders’ chagrin, the chief investment officer and chief operating officer…
Esma backtracks on account segregation
Status quo protected for rehypothecation of collateral in tri-party, securities lending and prime brokerage
Redemptions focused within strategies suffering losses in 2016
Redemptions focused within strategies suffering losses in 2016
Hedge fund redemptions a dismal end to a bad year
Managed futures funds saw big inflows in 2016, but left investors disappointed
Larger funds are net losers as outflows continue
Managed futures funds have seen biggest redemptions for three years