Until a few months ago, both job-seekers and investors saw hedge funds as something of a haven from the financial crisis. But as hedge fund assets shrivel, fund bigwigs now predict that the industry will shrink by one-third to two-thirds in coming years.
The one-third figure comes from Emmanuel Roman, co-chief executive of New York-based GLG Partners, which manages about $24 billion. At a conference in London last week, he said about 30 percent of fund companies will be forced to exit the business, according to Bloomberg. He also said the U.S. will begin regulating all hedge funds, which together with higher borrowing costs, will make it tougher for fund managers to make a profit.
This Tuesday an even bleaker forecast was voiced by George Soros, chairman of Soros Fund Management. "In my estimation (the industry) will be reduced in size by anywhere between half and two thirds," he said in a speech at MIT, as reported by Reuters. It's not clear if Soros meant the number of funds or their combined assets would shrink by the range he mentioned.
Perhaps best known as "the man who broke the Bank of England" for his hugely successful bet against sterling in the early 1990s, Soros regained the spotlight lately for his bearish market calls early in the current crisis and his very public support for Barack Obama's presidential campaign.
Reuters says hedge fund industry assets doubled in the past three years, to about $1.9 trillion divided among about 10,000 funds. This year, however, assets are shrinking due to both market-value declines and investors withdrawing their money.
A separate report from Tabb Group this week predicts hedge funds will slash spending on information technology by 40 percent next year, according to Wall Street & Technology. "Any software or service that directly supports the investment process stands a far better chance against this inevitable tide of cost cutting," the report states.
Soros suggested that not only the hedge fund sector must shrink, but the financial sector as a whole. Credit will be regulated, which will inevitably restrain profitability, he said. Noting that the finance sector generated as much as 40 percent of all U.S. corporate profits in recent years, he said, "That was an excess that we will not come back to."