Hedge funds' lure still hot but success uncertain

By Svea Herbst-Bayliss

NEW YORK (Reuters) - Wall Street bankers and traders, fearing possible layoffs, may strike out on their own and try to launch new hedge funds in the coming weeks, a top industry official said on Tuesday.

However, many are expected to fail as investors are demanding better track records in the once-hot sector chilled by dismal losses this year, she added.

"You will see a large number of people with big names and reputations trying to start up hedge funds," said Jane Buchan, CEO of Pacific Alternative Asset Management, a $10 billion hedge fund of funds that selects managers for pension funds and other large clients.

"Prop trading is becoming less lucrative and more talent will try to migrate to hedge funds," she said, referring to trading with employers' capital.

On her frequent trips to New York from her home base in California, Buchan said she often meets with bankers who are seeking advice on starting one of these loosely regulated portfolios in the once red-hot industry.

"Now the barriers to entry will be bigger and it will be a lot more difficult," Buchan said at the Reuters Hedge Fund and Private Equity Summit. "The days of two guys starting a hedge fund in a garage are over."

Buchan's clients, including pension funds like the Massachusetts state portfolio, are demanding better infrastructure and longer track records from the hedge funds they may be eyeing, and shying away from funding the newcomers in difficult markets.

At the same time, high net worth investors, a traditional source for hedge fund capital, are becoming more skittish now that hedge funds are turning in some of their worst returns ever amid tumbling stock markets, a deepening housing crisis and slower U.S. economic growth, Buchan said.  Continued...