The hedge fund industry is braced for a spate of failures as the financial crisis continued to spread through global markets, industry experts have warned. Hedge funds have lost more than 10% worldwide since the start of the year, according to figures from Hedge Fund Research, a US-based research company. Almost all funds have suffered some losses.
Mohamed El Erian, co-CEO of bond manager Pimco told Emerging Markets that “so much damage has already been created” in the financial system that more funds were set to go under. “We are likely to see further institutional failures over the next few weeks, mostly in the hedge fund community,” he said. “It’s done for them.”
However several key industry figures said they were confident it would not trigger a systemic crisis or a repeat of the chaos triggered by the collapse of the hedge fund LCTM a decade ago.
Andrew Shrimpton, former head of hedge fund regulation at the UK’s Financial Services Authority, said several hedge funds had been hit by the bankruptcy of Lehman Brothers in the US.
Shrimpton, who runs Kinetic Partners LLP, a leading global adviser to the hedge fund industry, told Emerging Markets: “The hurricane that’s blowing through financial markets means that they are not immune.
“There are more liquidations going on than ever and there is a shock wave and it will carry on with investor redemptions. People are talking about 20% of funds being liquidated because of the crisis,” he said.
Earlier this month CQS, a London-based fund, told investors that its flagship $4.25billion CQS fund has fallen 9.42% over the year to date while Tosca, a $6billion fund, had suffered losses from investments in Washington Mutual and Sovereign Bancorp.
But Shrimpton said they were solvent rather than insolvent liquidations, which meant that while individual funds would be wiped out, there would be no impact on counterparties.
He said regulators had put far too much focus on hedge funds in this crisis because they were obsessed with learning the lessons from the collapse of LCTM in 1998. “Hedge funds are not the centre – they are bit players compared with banks and AIG,” he said.
He forecast that hedge funds would be the long-term winners out of this crisis. “They will emerge stronger but things in the next few months will be tough,” he said.
Francis Beddington, co-founder and head of research at Insparo Asset management, a hedge fund specialising in emerging markets, said hedge funds had survived by running robust risk management strategies – something he said investment bank managers seemed to have forgotten.
“I don’t think they are a systemic risk. We do see redemptions and people going out of business so they have either lost money or they have closed,” he told Emerging Markets. “There has been no hedge fund embedded in the system like LCTM.”
Alejandro Dopazo, a director of Fincere Emerging Markets Portfolio, an emerging markets hedge fund in London, said US and UK funds had been hit by plunging asset prices and client redemptions. “Everything that expended the growth of hedge funds has gone,” he told Emerging Markets.