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To succeed in selling one’s hedge fund just when performance is deteriorating: an impossible equation ?

The number of funds on sale in Europe is in free fall because the owners have no choice other than mergers, even liquidation, because of rapidly declining performance which makes it impossible to sell at a good price.

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In the hedge fund industry, regulatory pressures add to the pressure to perform, particularly in fixed income. These strategies could "cease to be viable", according to BlackRock who was reacting to the very real possibility that financial transactions may be taxed.

The prospect of a 0.1% tax on bond and stock transactions has become the main political promise, causing much reluctance among buyers.

But it is mainly political uncertainties in the Eurozone which are casting a shadow on the future prospects of the hedge funds’ performance and potentially on their survival or their re-sale-ability. According to the President of Hedge Fund Research, Ken Heinz, it is this question which will solve the problem for Hedge Funds.

From Chicago, Ken Heinz indicated to Next Finance that the bond crisis in the Eurozone has signaled a return to risk aversion, this in all second level strategies which are more focused on shares. And even if the number of hedge funds constitute a net increase over 2011, the slow down was evident from last autumn when European political uncertainty sewed doubt among investors"

The difference between the performance of the top 10 hedge funds (+28,4) and the lower 10 (-24.2%) has never been as important as it is now"

At the same time, he continued, the volume of "dispersion" of funds has increased sharply, by 30% in the third quarter. The number of fund closures rose to 213 in the third quarter, an increase of 45% as compared with the same time the preceding year. Another fact: the difference in performance between the 10 best performing hedge funds (+28,4) and the 10 worst performing funds (-24,2%) has never been as great as it is now. Hedge funds recorded, in November, a drop in their volume for the fifth time in seven months. The month of August marked the worst month,

Ken Heinz referred to one of the studies carried out by his institute based on a questionnaire put to one third of all managers in the world, representing 800 billion dollars worth of managed assets.

Clearly the outlook is dismal for 2012, in that hedge funds have already lost 3,3% of their volume this year. According to Hedge Fund Research, managers of long/short equity are the ones struggling the most to either continue business or resell under favourable conditions since the loss was 5,3% last year. To sell under favourable conditions, it would be better to be in a globally macro position...

"Investors are now well aware that there were major macro economic changes linked to the volatile Eurozone which were determining factors for the 2011 performance and that these will continue into 2012. An important point to remember, is that share allocations will not be done according to experience and data based on past years or on the last two years, but will be "forward looking" in nature, that is based upon the perception of what people are expecting for the coming year, in particular as far as the European political situation is concerned, Ken Heinz explained.

It is about the second worst year since Hedge Fund Research first launched index studies in 1990.

This fact proves that is the second worst year since HFR first launched index studies in 1990. Only two balance sheets have been negative up till now: that of 2002 (-1,5%), in the footsteps of September 11 and the explosion of the technological bubble, and that of 2008. Nevertheless the situation in 2011 is still incomparable with the the whirlpool abyss of 2008 when the index fell by 19%. In 2011, the index fell by 4,4%

Translation for a hedge fund in difficulty : difficult, even impossible, to resell in satisfactory conditions.

Johann Harscoët , February 2012

Article also available in : English EN | français FR

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