1,000 hedge funds set to close in the near future

short-term outlook is bleak for hedge funds, says manager

More than 1,000 hedge funds worldwide will close in the next few months, most likely to be long/short equity strategies, according to Arthur Samberg of Pequot Capital.

Speaking at the Borsa Italiana conference in Milan earlier this month, Samberg said the short-term outlook for hedge funds is almost as bleak as for the technology and telecoms sector.

'There are a lot of similarities between the two ' both have great long-term futures and are dynamic,' he said.

Having run long/short equity since the group began in 1986, the US group is known for its technology expertise. It is hard to stay bearish on technology when it is something you love, he said, but there remain great reasons to be bearish. Valuations became ridiculously high in the late 1990s, leading to the collapse of the sector. While inventories are getting under control, there are still risks, especially as the debt in many companies is at absurd levels.

The venture capitalists who backed a lot of the IPOs during the boom years in the late 1990s are now returning to companies growing slowly and becoming profitable before going to market.

Technology investment comes in waves based on optimism, he said, adding that he does not see it coming back to this sector for some time to come.

Much of the boom in technology revolves around PC demand, something Samberg does not believe will increase for some time yet, as there are no new applications coming into the market.

'The problem with telecoms is that everything that could go wrong, did. There is too much debt, too much money was spent on third generation (3G) licences and no-one has accepted it the way it was anticipated and no real applications have been developed for 3G,' he said. As for electronics, he noted, it was hard to see what would drive it forward.

Added to the bleak outlook is a level of volatility in the market, which Samberg said he has never seen before, making investing even more challenging. This is having a knock-on effect on hedge funds, especially on long/short equity funds, as it has become difficult to achieve good rates of return.

Long/short was where most of the growth in the industry occurred in the late 1990s, the same as technology stocks, but the environment going forward is more challenging, he said.

'It will be interesting to see where the next wave of successful hedge funds will come from. It too is in a digestion period after a time of hyper growth,' he noted.

The industry is becoming legitimised, meaning growth is still going forward, Samberg said.

But he expressed doubt over the level of that growth. As hedge fund companies grow they will have to try to maintain the right culture in order to retain people, adding to the challenges facing the industry.