Hedge fund industry seen facing round of take-overs

The hedge fund industry faces a round of take-overs that will cut the number of independent fund-of-fund managers, those who invest in a variety of hedge funds, to less than a dozen, a fund executive said on Wednesday. "The hedge fund consolidation will continue", as fund managers face margin and cost pressures and a battle for distribution channels, Fred Siegrist, co-head and chief investment officer of Swiss-based RMF Investment Management, told an industry conference.
Siegrist, who is also on the management committee of MAN Investments, which owns RMF, said hedge funds were slowly becoming a commodity as the industry matured.
The hedge fund industry as a whole has grown to manage about $1 trillion in assets. Fund-of-funds, or those that invest in multiple hedge funds, manage around $250 billion of that, according to industry figures.
Over time, the number of independent fund-of-fund suppliers with a global presence will shrink to five to 10 as fund product platforms are broadened and the fight intensifies for customer access and marketing channels, Siegrist said.
To control costs, large investors' out-sourcing contracts are being replaced with in-sourcing efforts, keeping product management in-house, he said, which puts pressure on margins in the hedge fund industry. Net yields are coming under pressure from costs related to transparency and reporting requirements as well as taxes. The search for management is becoming harder, which also affects costs and margins in the industry.
He said the speed of consolidation would depend on the shape of the investment market, with an increase in demand likely to accelerate mergers and acquisitions.
"If (the industry) can extract itself from the lows forcefully and generate good returns again, things can go quickly. It depends on demand," Siegrist said.
Large financial institutions will dominate the industry. "Distribution will stay the top topic," he said. He predicted the industry would grow further, but not at the pace of the past decade and saw 5 to 7 percent returns on investment as realistic over time.
Globally, at around 2 percent of the combined worth of world stock markets, hedge fund assets still only account for a small portion of the investment industry, Siegrist noted.
Commenting on the fledgling German hedge fund market, he said: "Growth depends on performance. If (returns) stay as mediocre as they were the last few years, growth in Germany will be weaker than (global growth)."