Warning call for hedge fund investors
Growing demand for hedge funds and an influx of new managers means investors will have to be on their toes in searching for quality alternative investments, according to Joel Katzman, president and chief executive of JPMorgan Alternative Asset Management.
'We are going to see a supply-demand imbalance for several years as the percentage of higher-quality managers remains constant and demand for hedge fund assets goes up,' Mr Katzman said.
Growth in hedge fund assets has been strong, with about US$600 billion (HK$4.7 trillion) invested in 5,379 funds globally, up from US$30 billion to US$40 billion in 610 funds in 1990. This is still a fraction of the US$6.39 trillion invested in mutual funds in the United States.
Mr Katzman predicts that at some point in the next 15 years, hedge fund assets will overtake US mutual funds. Sixty-six hedge fund managers concentrating on Asia entered the business last year, some based in the region with others in the US and Europe.
He said 'capacity constraints' would be a growing problem for the better hedge funds. Investors would not have the luxury of watching a manager for a period of time before committing their cash, but would need to quickly perform their due diligence and invest before the funds closed.
He predicted funds of funds - which group together a number of different funds - would dominate over time as investors preferred to buy into a diversified portfolio and deeper resources gave bigger houses the edge in sourcing good funds.
Last year, the Hedge Fund Research fund of funds index returned 1.37 per cent against a 22 per cent decline in the Standard & Poor's 500 and a 10.25 per cent appreciation in the Lehman Aggregate Bond Index.
Short-selling strategies gained almost 25 per cent during the year, while equity hedging fell 3.82 per cent and distressed securities gained 5.47 per cent.
Hedge funds group together six main investing strategies, including short selling, long-short equity, distressed securities and merger arbitrage. They rely on the talent of managers to find money-making opportunities even when equity markets are in decline.
'No matter how you look at it, the inescapable conclusion is that hedge funds add value to a portfolio,' Mr Katzman said.
JP Morgan Private Bank clients have between zero and 20 per cent of their portfolios in hedge funds, up sharply since 1995, when they were first offered to Asian clients.
