London's status as global powerhouse strong

By Svea Herbst-Bayliss, Analysis

BOSTON (Reuters) - Hedge funds are ready to set records this year, but their achievements are not the stuff managers or investors want to brag about.

"The bubble has popped and there is going to be a lot of pain," said Bradley Alford, the founder of hedge fund advisory firm Alpha Capital Management. "There will be a massive reassessment of where money should go."

Until recently, it was a red-hot industry known for its double-digit returns, money pouring in and billion-dollar paychecks. But a growing number of firms are now facing investors asking for their money back as staff worry whether there will be another paycheck, amid terrible returns.

As pressure from poor returns and redemptions builds, more funds than ever will be forced to liquidate, investors said. Many expect the $1.8 trillion industry's estimated 10,000 funds to be winnowed down by a few thousand in a few years.

"This year is going to be really ugly," lamented one manager, who did not want to be identified because his investors do not know yet about his double-digit losses. "One day you are off 2 percent and, before you blink, you are down 20 percent. This year is just unpredictable and crazy."

Tallying the first quarter's wreckage, including the collapse of hedge funds Peloton Partners and Sailfish, investors agree things will get worse before they improve.

They are not much more optimistic about the private equity industry, where deals requiring big debt financings are getting done less often.

"At this point, when the liquidity spigot is turned off pretty much, its a brave new world and one in which the private equity game rules have changed dramatically," said Michael Holland, chairman of private investment firm Holland & Co and a former partner at Blackstone.  Continued...