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Hedge fund market “overheated” - Greenwich

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GLOBAL – Greenwich Associates has warned of possible “overheating” in the hedge fund market – driven in part by a flood of pension capital.

And it said the availability of cheap credit is making it easier for hedge funds to increase their leverage, which could increase “the likelihood of intervention by regulators already concerned about the huge flows of pension fund assets into hedge funds”.

“None of these developments - a flood of pension capital, increasing leverage, declining haircut requirements or easier credit - would, on its own, be a cause for immediate concern,” said Greenwich consultant Peter D’Amario.

“In aggregate, however, these trends bear serious consideration on the part of hedge fund investors, not only as possible indicators of an ‘overheated’ market, but also as potential harbingers of intervention by regulators in the United States and Europe.”

D’Amario’s colleague Tim Sangston added: “Without a doubt, the ability of hedge fund managers flush with capital - including pension capital - to shop from multiple prime brokers’ offerings is contributing to the overall growth of the hedge fund industry.

“The question is whether the industry is growing too fast. Has it become too easy to set up a hedge fund? Has it become too easy to get capital? Has it become too easy to leverage?”

Greenwich said the biggest contributors to the current hedge fund “boom” are pension funds.

D’Amario said: “There’s a growing perception that the money flowing into hedge funds today is not just coming from wealthy individuals and endowments who can absorb a hit if things go awry.”

The firm said hedge funds are likely to come under greater regulatory scrutiny in the coming months and that it is likely that this will culminate in new regulations in the UK and US.

It added: “Hedge fund investors should attempt to stay ahead of any new regulation by taking careful measure of the risk-management procedures, disclosure policies, leverage levels, and capital introduction practices of funds under consideration for investment.”

“While we do not necessarily favour increased regulation of hedge funds, the data from our research does not contradict the concerns the regulators are voicing,” Sangston said.

It has emerged that Denmark’s three billion-euro Juristernes og Økonomernes Pensionskasse, or Pension Fund for Lawyers and Economists is looking at hedge funds as an investment possibility.

Head of equities Jesper Jakobsen told IPE that the fund would consider whether to invest in hedge funds but no decision had yet been made. The fund may come to a decision later in the year, he said.

The UK’s National Association of Pension Funds is hosting a seminar on hedge funds on June 3.

Separately UK-based alternative asset manager Man Group said that fund of fund sales to institutions rose to 3.7 billion dollars in the year to the end of March, from 2.4 billion dollars a year before.

Man said it has won mandates in France and the UK, with “good progress” in the Netherlands, although a spokesman declined to name the clients.

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