10/11/2004

Tougher times ahead for hedge funds, claims survey

The massive increase in hedge fund assets under management over recent years along with market changes has dramatically limited the opportunities for hedge funds to exploit market anomalies, concluded a survey by JP Morgan Securities released last month.

The almost doubling in the number and market value of hedge funds in the last five years is making the environment for managers far more difficult. The report found that a review of the inefficiencies hedge funds have been trying to exploit in interest rate, credit, currency and equity markets showed "market opportunities have been eroded most in the areas where we have seen the most hedge funds activity: equities and interest rate markets. Opportunities remain alive in areas where there are few hedge funds (credit) or where they remain small against world capital flows (forex)."

JPMorgan claimed that investment techniques that rely on proprietary information or that have only been introduced recently "are still performing fine".

Despite the sharp rise in the amount of hedge fund assets together with the extreme levels of low volatility experienced in most markets in 2004, the high correlation between markets and new lows in credit spreads reached this year, the investment house concludes "it is too early to write off hedge funds".