Gaim International, the annual get-together of the global hedge fund industry, took place in Monaco this week against a backdrop of continuing fallout from the credit crisis that was triggered just a year ago. The bad news, according to star manager John Paulson, is that declining consumer spending is pushing economies into recession, and it may still be too early for distressed investing. The good news? When the opportunity is ripe, the opportunity to capitalise on a recovery in distressed assets could be as great as USD10trn.
Hedge funds are known for their active and aggressive investment strategies, but they seem to be resigned to the fact that hard-line tactics may not get them far during this turbulent period. Instead the talk of the town currently revolves around global macro and market neutral strategies.
At the 14th Gaim International conference in Monaco, star hedge fund manager John Paulson - who made billions shorting the US sub-prime mortgage sector last year - said that the credit crisis was not over and total losses in the financial sector would eventually reach as much as USD1.3trn. 'The primary factor leading to recession will be a decline in consumer spending, and I believe that will be more pronounced in the coming months,' he told delegates
Even distressed funds, often cited as an ace in the hole in the current environment, have taken a back seat - at least for now. Distressed funds seek to buy the discounted loans or other debt of companies that have defaulted on debt payments or are set to enter into administration or financial restructuring, betting on riding out the tough times and earning strong returns from a turnaround.
Distressed debt investing will throw up opportunities as corporate defaults rise, but hedge fund executives believe this will take time. 'Until the credit cycle bottoms, it's not a good idea to go too long distressed, and it's not likely to occur before the end of next year,' said one manager.
Paulson also reckons it is too early to start distressed debt investing, but he believes a huge opportunity will eventually emerge. 'I do think, long-term, distressed presents an opportunity that is as much as USD10trn,' he said. 'That is a reflection of how much the credit markets were overvalued on the upside.'
As market participants such as hedge funds examine the ongoing global financial uncertainty, there are bound to be many casualties. First up are prime brokers, many of which were set up by investment banks to cash in on the boom when times were better.
But now the writing is on the wall. A recent survey conducted by FINalternatives suggests that one in three hedge funds are not satisfied with their prime brokers and would consider a change (or have already changed) because they are 'poor performers'.
According to the latest FINalternatives prime brokerage survey, which polled around 120 hedge fund and CTA managers about key aspects of their relationships with prime brokers including personal service, cost and value, expertise, capital introduction capabilities and electronic execution, as much as 38 per cent of fund managers regard their prime broker's capital introduction service as 'poor' or non-existent.
Today's volatile environment has provided many hedge funds with additional reason to rethink their core service providers and the impact they have on investors, FINalternatives says. Forward-thinking prime brokers believe they must adapt to the new era by undertaking roles traditionally provided by other financial providers such as administrators and custodians.
Many in the industry see this trend increasing in the future as fund managers seek a one-stop shop from which they can receive a wide array of alternative fund services on a consolidated basis. The new prime broker - or overall fund service provider, if you will - must provide easy and consolidated access to a full range of top-tier specialist services.
This week's Gaim International conference, the global hedge fund industry event attracting the largest number of asset allocators, could well be compared to the Bilderberg Group. It is probably the most high-profile global assembly anywhere of investors and asset managers, an unparalleled array of intellectual firepower.
The 14th annual Gaim International meeting will probably be the most critical conference of its kind, as it is the first time an army of alternative investment decision-makers has assembled in such numbers to share ideas since the onset of the credit crunch last year. If a solution is to be found to the ongoing crisis, it may well be here.
The Bilderberg Group is frequently accused of being secretive and a manipulator of global events. The group's secrecy and its connections to power elites have bolstered its reputation as one of the most influential forums on government policy and international relations.
Gaim might not be as secretive, but arguably its attendees are equally powerful and influential. Keeping a close watch on the deliberations of the conference may well offer invaluable insights into what to expect from the global economy in the coming months.
The Financial Services Authority has clamped down on the lucrative practice of short-selling shares on the London market, following accusations that traders were seeking to profit from the difficulties of some of Britain's best-known companies.
The City's financial watchdog has announced that from this Friday, all investors will be required to disclose any short positions greater than 0.25 per cent in companies that are preparing for a rights issue.
In a statement, the FSA said: 'In current market conditions, there is increased potential for market abuse through short-selling during rights issues. As a result, there has been severe volatility in the shares of companies conducting rights issues. This is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the UK market.'
Two things will happen. Hedge fund managers have already accused the FSA of making broad changes to the rulebook without any consultation. The Alternative Investment Management Association says the industry will seek a meeting with the FSA to argue its case. There is a possibility that the FSA might be the target of a wave of litigation - something that occurs frequently when market conditions are bad.
Meanwhile hedge fund managers, arguably the best investment strategists in the world, will moan about these changes for a little while before finding other tactics to take advantage of ongoing market events. Will the FSA try and block those too?