Inflows not weakening hedge fund returns: HSBC

By Tom Burroughes

LONDON (Reuters) - Hedge fund returns have hit speed-bumps in recent years, but the sector cannot blame a mass inflow of money from institutions for causing weak performance, a senior HSBC executive said on Wednesday.

Hedge funds, which have assets estimated between $1 trillion and $1.5 trillion, have returned less than the stock markets in recent years.

Some commentators say big inflows from institutions into hedge funds are crowding the market, but that is unlikely to be the main force at work, Bill Maldonado, chief executive officer, alternative investments, HSBC Halbis Partners (UK), told the Reuters Hedge Funds and Private Equity Summit.

"What we read about in the mainstream press is that hedge fund returns have been compressed by the huge volume of money into hedge funds ... Broadly speaking, that isn't true."

Low market volatility, a relatively calm global economic environment and low interest rates have removed some of the opportunities hedge funds typically need to make money, he said.

"All of these things have had an important bearing on the Alpha (market-beating returns) that hedge funds can generate."

However, some specific hedge fund strategies have been squeezed by the weight of client money, he said.

For example, merger arbitrage funds that trade shares of firms in takeover battles have seen returns fade in the face of high inflows.

"There are risk premia in certain types of hedge fund strategies ... You were taking a risk and being paid for it, and it was no cleverer than that."

Maldonado said HSBC aims for hedge fund returns likely to appeal to institutional investors, in the region of between 10 and 15 percent. His group oversees a total of about $1 billion in hedge fund assets.

PERFORMANCE

Between 2000 and 2002, hedge funds on average returned more than 3 percent, while the MSCI index of world stocks .MSCIWD lost more than 10 percent. But since then, hedge funds on average have failed to beat the MSCI index.

Average returns slipped to about 7.6 percent in 2005, below the 10 percent earned by the MSCI index, according to index compiler Credit Suisse First Boston Tremont Index.

So far this year, hedge funds have on average returned about 3.6 percent, based on CSFB/Tremont data.

Investors such as pension schemes, university endowments and charities have embraced hedge funds in recent years due to the ability of these asset pools to make money in a range of market conditions.

Industry watchers say pension funds, eager to secure steady income to pay for an aging population, will continue to pile into hedge funds, driving the sector's assets to the $2 trillion mark in the next decade.