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2014

KPMG sees new blood reinvigorating hedge fund industry despite shake-out

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Next year will see the strong return of value investing, a shake-out in the hedge funds industry that will also see a welcome influx of new talent, changes to prime brokerage relationships

Next year will see the strong return of value investing, a shake-out in the hedge funds industry that will also see a welcome influx of new talent, changes to prime brokerage relationships and probably more intrusive regulation, according to KPMG’s European head of investment management Tom Brown.
 
‘We are already starting to see the more forward-thinking investors focusing their attention and capital on finding undervalued assets and snapping them up for rock bottom prices,’ Brown says. ‘This value investing will continue into 2009 and some organisations will make sound returns as a result.’

He expects many hedge funds to close, but also predicts that the turmoil throughout the financial services industry will produce an injection of new talent into the industry from traders with innovative ideas and fresh perspectives.

‘Next year will likely see a massive shake out in the hedge funds industry,’ Brown says. ‘We expect that many firms will not survive the year as coming back from a fallen fund is very difficult. Many will likely be forced to close out their funds, write to their investors, return the money that is left and call it a day.

‘This, however, is in direct contrast with the trend that we also expect to see – new blood entering the industry as talented traders from banks bring their creative ideas to bear. Investors will continue to look for alternative investments, and smart, bright new upstarts with strong and sensible strategies might just be what is needed to restore confidence and drive investment.’
 
In the wake of the problems encountered by some hedge fund managers as their prime brokers have been forced to withdraw or impose new conditions on the leverage they provide, Brown predicts that managers will seek more traditional relationships with multiple prime brokers.

‘The symbiotic relationship between hedge funds and prime brokers is broken and needs to be fixed,’ he says. ‘In 2009, prime brokers will likely find managers looking for arrangements that mirror more traditional and secure custody agreements and wanting to spread their risk across multiple providers. Both trends will mean that the profitability of prime broker businesses will be somewhat reduced.
 
Overall, the asst management industry in the UK must learn to live with not necessarily new or more regulation, but a more intrusive approach. ‘The Financial Services Authority will actively begin to visit those managers it has not yet seen, visit organisations on a more regular basis in general, and probe more deeply into the business,’ Brown says. ‘This, of course, will mean an extra cost burden for managers, but being well prepared and managing these FSA visits effectively is critical to future success.’

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