Last week's announcement from Hedge Fund Research that the industry manages $1 trillion (see page 15...
Last week's announcement from Hedge Fund Research that the industry manages $1 trillion (see page 15) could understate the true figure by two or three times, if sums in investment banks' proprietary trading operations are included, according to Stanley Fink, Man Group's chief executive officer.
Fink said the industry excluding prop traders could hit $2 trillion within three years, faster than the five he earlier predicted, however, some of this could come from banks' reallocations to traders setting up separately.
"A lot of hedge fund strategies are being done inside Wall Street banks, and the market is probably $2-3 trillion, with half or two thirds being done inside the banks," Fink said.
In the month ex-Goldmans employees Geoff Grant and Ron Beller announced establishing Peleton, expecting to soft close at $1bn, Fink suggested more traders could follow this example. "For our internal plans we have assumed the market would grow at around 15% and we have always looked to grow as fast as, or faster than, the market. The market will definitely get to $2bn, it is a question of when, not if."
He said the rapid growth - around 20% annually, against Man Group's of around 40% - would continue for "quite a long time to come."
John Dermaine, managing director and head of alternative investments at Barclays Global Investors (BGI), is more sceptical: "Whether it will reach $2 trillion in five years is anyone's guess," he said. But Peter Bennett, senior investment partner at Gottex Fund Management, expects double-digit growth to continue. "Whether this will be 10% or 30% I don't know but I am sure it will be significantly faster growth than in most of the rest of the financial markets."
Dermaine worries strong performance is not assured. Risk and return levels are inversely correlated to capacity, he noted, and while this relationship is complicated by other factors, there will certainly be downward pressure on performance as the industry grows. However Fink said hedge funds, as the asset class least correlated to stocks, would be the main beneficiary of diversification money.
Institutional involvement in the industry will also drive growth, with allocations likely to rise from the average of less than 5% of total portfolios. Bennett says a figure as high as 10% is entirely feasible, though even a more modest rise would see the official industry figure reach $2 trillion in three to five years.
Fink said while some strategies would hit capacity earlier in non-volatile conditions, there was not a question of little manager talent. "It is a matter of cometh the man, cometh the hour," he said, "if there is a big opportunity out there the talent will come to find it."
Fink named insurance derivatives such as weather credit and new commodity classes as classes that could still develop.
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