Last fall I was on a conference call with several prime brokers. After the introductions were through, the conversation among the assembled prime brokers turned to business. Specifically, how business was.
One of the brokers spoke of business in 2009 in terms of business in 2008. “A year ago it felt like the world was ending,” he said. “This year I sense people are feeling a lot more confident.”
Seems like a simple observation, and it was. The other prime broker representatives on the call all concurred, and offered anecdotal evidence from their own experiences. But that was last year, and as good and relieved as everyone on that call was I found it hard to muster any enthusiasm of my own for 2010.
January seemed to bear out my pessimism. Hedge fund returns were down or essentially flat, depending on which index one consulted. And yet we published a fairly extensive list of hedge fund launches. Not that unusual for the start of the year, I thought. But it seems the optimism I sensed on last fall’s call is carrying over into this year.
Yesterday we ran a story quoting Alex Ehrlich, head of prime brokerage at Morgan Stanley, saying hedge fund launches are up this year over last year.
“Without being specific, Mr. Ehrlich said between 15 and 100 newly launched hedge fund firms will start working with Morgan Stanley this year. The numbers suggest that portfolio managers and traders who are now working at banks or other hedge funds are still very eager to hang out their own shingles even as industry analysts report that it is becoming more difficult to launch these funds.”
Left unsaid in the story is exactly why experts say launching hedge funds is becoming more difficult. Investors, of course, are demanding greater transparency, although some of the air has been let out of that balloon following a year that weeded out a lot of poor-performing hedge funds (2008) and a year that saw performance rebound (2009).
I suppose the prime broker ranks have thinned a bit, which could make starting a fund harder. Additionally, investors were for a time more leery about hedge funds, but I sense that’s changing as well.
We ran a story today about fees, not a new topic but one that periodically gains traction in the media. The new reason fees are expected to fall is that managers trying to win big institutional mandates are bowing to demands to lower fees.
“‘Some hedge fund managers are already being paid 1 and 15 when they manage institutional money and our expectation is that we will see more of this,’ Andreas Utermann, Global Chief Investment Officer at Allianz Global Investors equities arm RCM, said at a separate briefing this week.”
It has long been true that some funds will deal on fees for large clients. Others won’t. The argument for higher fees has been, and will continue to be “do you really want to invest in a fund that’s going to deal on fees?” The implication being, of course, that confident and talented managers will charge higher fees because they’ve earned that right by providing good returns.
Fees aside, February’s hedge fund returns are coming in and it looks like the news is good. Hedge Fund Research reported that its HFRI Fund Weighted Composite index gained 0.52% in February, reversing a January loss and bringing the year-to-date return to negative 0.18%. Hennessee Group’s broad hedge fund index gained 1.2% in February after losing 0.5% in January.
Personally, I’m still expecting a flat or even slightly down year for hedge funds. It’s just a feeling. February’s numbers look good, but that was last month. We’re already into March and aside from a long-awaited thaw here in the Midwest, I still don’t see a whole lot of reason to be optimistic.