Hedge funds are not a magic cure for investment woes according to a senior World Bank official. Graeme Wheeler, vice president and treasurer at the World Bank, told an ICBI financial conference thatPension funds as well as endowments mistakenly think that hedge funds will solve all their investment problems, by pouring money into such instruments.
Wheeler warned that when pension funds loose money in hedge fund investments, rules under which those retirement schemes operate could be quickly tightened up. Wheeler said, “Pressures for additional regulation could increase if there are losses for institutional investors who don’t understand the risks – there are some grounds for concerns� adding, �Our main concern is that we have many institutional investors seeing hedge funds as modern-day alchemists solving their funding problems.”
Many pension funds suffered significant losses from the technology meltdown about 4 years ago. There is also another issue affecting such retirement schemes, the number of aging workers is expected to increase significantly, such increases will undoubtedly bring additional pressure on retirement funds. Such matters have propelled pension funds and endowments to seek for additional sources of asset growth through hedge funds. Wheeler said, “Low nominal returns add to the pressures that institutions face … it does draw them into the hedge fund space�.
Wheeler also warned that hedge fund returns have moderated in 2004, and such trend may also continue in the immediate future. Such dilution of returns may result from the heavy capital inflows which hedge funds have experienced in the recent years. Heavy capital inflows will dilute trading opportunities available in the markets, according to Wheeler �This suggests that opportunities are greatest where there are few hedge funds or hedge fund flows are small compared to the total capital markets, and where derivative markets are not deep.� A recent study by Bank of New York suggests that hedge fund assets coming from the institutional investors will soon account for over one half of all hedge fund asset inflows.
Competition among hedge funds will result in increasing leverage levels, but so far leverage levels have moderated, he said the Central banks are also watching the hedge fund industry for possible signs of stress, for now such evidence has not yet manifested.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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