The global hedge fund industry, which has been hit by severe outflows and mark-to-market losses, is set to lose at least 25% of its assets in the last quarter, a global authority which tracks developments on these mystery players told DNA Money.

The industry, which has shrunk from $1.8 trillion at the end of the second quarter to $1.63 trillion in September 2008, is set to lose at least $470 billion more by the end of December 2008.

Aureliano Gentilini, global head of hedge fund research at Lipper, mailed, “Under a worst-case scenario, since the bulk of money outflows for the year will be recorded in the fourth quarter for a number of reasons, $30 billion outflows in Q4, combined with a negative performance reading of minus 10% for the broad hedge fund index in October through December, would lead to an overall reading of $1.16 trillion at the end of December 2008.”

He says, in the meantime, India must aggressively market itself as a great opportunity NOW and help investors understand that, on a company-by-company basis, there are many great opportunities NOW to invest and not to just look at it on a macro-basis.
Gentilini of Lipper feels strategies which received inflows in the third quarter will continue to be favoured.

“Looking at money flows as a proxy of hedge fund investors’ preferences in US-dollar terms, positive hedge fund sub-strategy inflows were experienced by the Global Macro, Managed Futures, Equity Market-Neutral, and Dedicated Short-Bias strategies.

Combined inflows across these strategies amounted to $4.60 billion, compared to $12.04 billion in the second quarter. I expect the strategies above, along with Option Arbitrage, might continue to post positive inflows in the last quarter of 2008.”

Freeman on the other hand feels most managers are holding more cash. They are also avoiding shares where FIIs can impact the price by selling heavily.

He says shorting is not hot anymore. “Some funds may be seeking to reduce downside by creating short positions, but I wouldn’t say it’s more popular. Besides, shorting in Indian stocks by FIIs can’t be done directly, just in F&O market. I think the bias is to stay in cash — some to go back into India and some to pay redemptions on completely non-Indian portfolios,” Freeman said.

Another hot idea is green investing. Hedge funds are now looking at socially responsible investing in emerging markets funds for foreign investors. These funds will target stocks of companies that comply with ‘social responsibilities’.

Managers like Freeman are still bullish on India. They feel the country offers an oasis of high growth that is almost impossible to find in the developed world, which is slipping into a recession. “However, the challenge is to find investors who understand “Buy Low, Sell High” to take advantage of great global emerging markets, especially India that are “On-Sale” right now,” Freeman said.

He warned that the outflows could be steeper as more investors press ‘sell’. “Outflows may well exceed the $30-billion mark… nevertheless I think performance for the broader index might be above the 10% negative reading level. But an AUM overall reading of $1.00 trillion at the end of December 2008 appears to be overly pessimistic.”

Experts feel things may not change dramatically in the new year too. Seth R Freeman, CEO of California-based EM Capital Management, LLC, which has substantial interest in India certainly thinks so. “No! January won’t trigger anything in particular. May be a little money will trickle in, but it won’t be until may be Q3 that we see some improvement.”
Source: DNA India