UBS AG, the largest Swiss bank, said it has been in talks with “dozens” of proprietary traders from firms worldwide who may start their own hedge funds as banks seek to comply with new U.S. rules aimed at curbing risk.
“A lot of it is just talk and chatter, but there are very advanced discussions as well,” Stuart Hendel, UBS’s global head of prime brokerage, said in an interview in Singapore yesterday. “In the next 12 months, there is going to be much more of a startup phase than there has been in the last couple of years.”
Banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. are complying with the Dodd-Frank financial-overhaul act in the U.S. that prohibits them from risking capital by betting for their own accounts. Goldman Sachs, which makes about 10 percent of its revenue from proprietary trading, decided to disband the principal-strategies group, two people with knowledge of the decision said last month.
Some traders are teaming up to form groups, said Hendel, who is based in New York and was in Singapore to attend UBS’s annual hedge fund conference. Managers will also leave existing hedge-fund firms that haven’t reached their high-water mark, or the historical peak net asset value of a hedge fund, he said.
“Funds with poor performance will splinter,” he said.
It will be harder to raise assets as investors need managers to put in place the necessary infrastructure and risk management platforms before putting their money into hedge funds, he said.
“The bar is going up,” Hendel said. “You can’t start with three people in a garage anymore on your Mastercard.”
Prime brokerages provide services such as cash and securities lending, custody, introduction to potential investors and startup consulting services to hedge funds.
There will also be more hedge-fund closures as about a third of funds are still under their high-water marks, making them unable to charge incentive fees two years in a row, he said. Some also will fail to achieve “the size and scale they need to survive and thrive” as they find it tough to raise assets, he said.
“Investors are focusing on a lot of different things that have to be resourced by the underlying hedge funds and you can’t do that with $20 million, $30 million, $50 million,” said Hendel, who joined Zurich-based UBS last year from Morgan Stanley where he was the global head of prime brokerage in New York. “If you don’t have $100 million in the U.S., you’re going to struggle.”
The industry’s assets declined 1.2 percent to $1.65 trillion in the second quarter and remain below the peak of $1.93 trillion in June 2008, according to data provided by Chicago-based Hedge Fund Research Inc.
Investors are “spending much more time doing their due diligence” and paying more attention to investment strategies, said Des Anderson, head of trading at the Asian office of London-based hedge-fund firm Marshall Wace LLP.
“The lead time to getting investments now is much longer than it was pre-crisis,” Anderson, who is based in Hong Kong, said today at the UBS hedge-fund conference. “In the past, you could expect to get investment within two to three months of detailed meetings; now it’s at least six to nine months.”
There have been 73 Asian hedge fund closures this year, according to Singapore-based industry data aggregator Eurekahedge Pte, after 107 in 2009. Singapore-based Amoeba Capital Partners Pte, run by the former head of Asian investments at Morgan Stanley’s asset-management unit, is returning money to investors in its stock hedge fund, citing “tough” industry conditions, Managing Partner Ashutosh Sinha said this month.
The proportion of Asian hedge-fund managers overseeing $50 million or less has grown to 66 percent of the industry, from 57 percent two years ago, according to Eurekahedge.
Managers in Asia are seeking to consolidate by merging with others or joining more established hedge-fund firms, said David Gray, UBS’s head of prime services in Asia-Pacific.
“What we’re seeing is probably an evolution, Darwinian in a way,” said Hong Kong-based Gray, who also was in Singapore for the conference. “Once the froth of the bull market leaves and you’re left with some of the harder commercial realties, you will see some players leave the business, but you will see others evolving to either merged structures, joining platforms.”
Hedge funds had their best September on record, led by managers investing in Asia ex-Japan and emerging markets, and funds that trade equities, according to Eurekahedge.
The Eurekahedge Hedge Fund Index, which tracks more than 2,600 funds worldwide, rose 3.5 percent last month, bringing its year-to-September advance to 5.2 percent, Eurekahedge said in an e-mailed report this week. The index had its second-best monthly return since May 2003, the Singapore-based data provider said.
“When the opportunity set improves, hedge funds will start increasing their conviction, putting more money to work, buying and selling a little more, increasing their exposure to the market,” Hendel said. “That will bode well for the industry.”