WEST PALM BEACH, FL (HedgeCo.Net) – Hedge fund industry participants are increasingly worried about the growing level of overleveraged hedge fund of funds, according to a report by Reuter�s newsservice. Significant new capital is hitting fund of fund managers through the institutional investor angle. Many of these investors consider fund of hedge funds considerably safer for maintainingdiversified portfolios.
Currently fund of funds manage $100 billion in investor assets, representing only about 10% of the total of 1 trillion in assets managed by the hedge fund industry. Fund of fund managers have increasingly borrowed money at greater levels. This trend worries hedge fund industry analysts because of the apparent dangers affiliated with overleveraging portfolios.
Jan Frogg, head of the hedge fund division of Swiss wealth manager Union Bancaire Privee (UBP) warned that this trend is troubling, in light of the declining hedge fund returns seen in recent months. Frogg also said, this trend is risking investment outflows, and may also undermine the credit ratings of fund of fund managers.
The banking supervisors worry that the lack of transparency and regulation, in addition to growing hedge fund assets, are creating potentially dangerous conditions. Iain Jenkins, managing director of specialist magazine Euro Hedge, thinks such safety issue is the number one concern for their industry. Jenkins said, “If the funds don’t take enough risk, then the funds of funds decide they would do it for them; if there’s any evidence that it goes much higher then people will start to worry,” according to him.
Jenkins also warned that the level of European hedge fund failure has risen from about 7% to almost 10%, and shutdowns are reaching a level of 47%. This trend should be seen as a sign that the industry is going through a consolidation process. Jenkins is concerned that if hedge fund performance does not fare better in the next six months, this tendency may adversely impact the new money coming to the industry.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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