The New Normal Marketing Hedge Funds in Asia

"Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery."

Winston Churchill, U.K. Prime Minister during WWII & author (1874-1965)

2010 has just kicked-off and the world of hedge fund investing has turned on its head. The following generalizations are well known but not yet explored as the mass media tries to paint a "return to normal" image of an industry fully recovered from the credit crisis, scandals and gating issues of 2008/09.

Here are some of the still apparent realities in the New Normal world of the hedge fund industry:

• As many as 70% of all hedge funds (approximately 7,000 fund firms) still have not recovered their high water marks following 2008 average losses of 25-45%.

• This one is anecdotal. As many as 50% of all hedge funds, have not been paying staff or partner salaries over the last 6-months as typical hedge fund firm cash "burn rate" accelerated in 2009. This has hit firms with AUM under $200 million and is in spite of the +60% equity market run-up since March 2009.

• A still large number of funds will close as partners throw in the proverbial towel on subsidizing the fixed costs of their funds. There comes a time when enough is enough! Expect more "early retirement" stories over the next 6-9 months.

• A still indeterminate (yet significant) number of investors remain "gated" in illiquid investments following 2008 losses, and they still cannot get their money out. In many cases, investors are still being charged fees on these trapped assets!

• A new and important DDQ question that investors are implementing en masse is simply: Did your fund make a profit or a loss in 2008? If the answer is a loss the fund will not get any allocation. This appears to be a hard and fast (and yet unspoken screening rule) that many institutional investors have been implementing so far since 2009. The bar has been raised.

• The hedge fund of fund industry is in REAL trouble. As a whole, assets are bleeding as investors either sit on the sidelines or go direct to single managers. Considering this category used to make-up over 30% of all investors in single managers you imagine how the typical buyers have vanished from the scene. You can imagine too what this has meant for all those specialist marketing staffers who used to service HFoF, HNWI, family offices, private banks and endowment) niche? You guessed it - they are being let go in record numbers as the underlying fund firms try to find a fresh set of rainmakers.

• To all extent and purposes no hedge funds are closed anymore. None. Provided you are considered deep pocketed and long-term (i.e. institutional). This marks a big change from 2007 and explains why the bigger multi-strategy funds are hiring these gatekeepers to the institutional investors or other gatekeepers (consultants).

• Latin American and Swiss investors have not made any meaningful allocations since the end of 2008. It may take another 12 months before they return. Such has been their collective losses/embarrassment in the wake of Madoff and other scandals. The streets of Rue de Rive and Bahnhofstrasse are quiet. Mahalo.