Hedge funds are a long-term growth story, but change in the current landscape of the fund of hedge funds industry is inevitable, according to Salus Alpha.
The Geneva-based fund of hedge funds manager agrees with forecasts that the industry could be on the verge of a period of consolidation. And that is despite institutional assets continuing to flow into hedge funds and in particular, funds of hedge funds, which now account for an estimated 40 to 50 per cent of the hedge fund community's total assets. The number of hedge funds may increase in the short-term, but consolidation is expected in the near future.
Oliver Prock, managing director of Salus Alpha, said:"Only fund of funds of a certain quantity and quality will survive. Salus Alpha has foreseen the trend and the need for consolidation some time ago. At the moment we are finalizing a take over of a fund of hedge fund, and others are to follow in the near future."
Salus Alpha´s evaluation of the market situation is supported by research carried out by business school Edhec, which shows that poor hedge fund performance last year and the growing risks of failure are forcing more managers to close shop or to consider joining forces with others in the industry. Edhec believes big firms are buying smaller firms to gain capacity in the industry, while increased competition as the industry grows, and lower returns, are also putting pressure on fees which is encouraging consolidation.
Distribution will be one of the top topics in the future, favoring bigger fund of funds companies and leaving the smaller ones behind. The exponential growth seen in the hedge fund sector would sooner or later moderate.
"This is just a normal scenario, happening in every line of business after some time," says Prock. "However if you 'oversleep' the changes happening right now - especially if you are a small fund of funds company - you might find yourself in serious trouble."
According to Prock, Salus Alpha is continuing to closely monitor smaller companies that could be of interest as "take over candidates".
The hedge fund industry saw a lot of money flowing in the previous years, nevertheless hundreds of funds shut down, mainly because of poor performance. The industry will face a round of takeovers until the number of funds is cut down to a reasonable amount, testifying to Darwin's theory of survival of the fittest.
Background notes: Salus Alpha is an alternative investment management company headquartered in Switzerland with subsidiaries in Austria and the USA. Since the formation in 2001, Salus Alpha has launched four funds namely: the Salus Alpha Global Fund; the Absolute Return SA; the Absolute Return SA Institutional; and the Salus Alpha Managed Futures. The company currently has more than EUR 150 million under management.
Hedge fund analysts at Salus Alpha gained extensive experience with investment banks in fund of hedge funds management, before joining the company. The Salus Alpha investment process is based upon three equally important criteria: strategy allocation (Top Down), manager allocation (Bottom Up) and continuous monitoring (Risk Management).