Hedge Funds -- Trends and Challenges--

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Hedge Funds-- Trends and Challenges--

• Edwin T Burton
• Professor of Economics
• University of Virginia

Scottsdale
Blue Ribbon Hedge Fund Conference
January 30, 2007
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Where we are in Hedge Fund land?

• Continued dramatic growth in assets
• Performance problems
• Headline Issues
• Regulatory stirrings

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Where we are in Hedge Fund land

• Continued dramatic growth in assets
• Performance problems
• Headline Issues
• Regulatory stirrings

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By the end of 2006
1.4 Trillion
9,400 hedge funds
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Trends in Hedge Fund Growth

• Continued growth from traditional sources
• High Net Worth
• Endowments and Foundations
• Explosive potential growth from
• Public pension funds
• Retail?????

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By the end of 2007
1.8 Trillion
Over 10,000 hedge funds
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Where we are in Hedge Fund land

• Continued dramatic growth in assets
• Performance problems
• Headline Issues
• Regulatory stirrings

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Versus the SP500
1990
2000
2006
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Logical issues

• The statistical problem
• The zero beta phenomenon
• The beta problem

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Practical Issues of Performance

• Where did the money come from to fund the hedge
  fund program
• Equities? Fixed Income?
• Portable alpha?
• Risk
• More leverage?
• The portfolio problem?
• It is not enough to find a good manager
• You must find a portfolio of them

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Where we are in Hedge Fund land

• Continued dramatic growth in assets
• Performance problems
• Headline Issues
• Regulatory stirrings

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Headline Issues

• LTCM
• Ameranx
• Crooks
• Rich Hedge Fund Managers

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Where we are in Hedge Fund land

• Continued dramatic growth in assets
• Performance problems
• Headline Issues
• Regulatory stirrings

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Regulatory Stirrings

• Two points of view
• Investor Protection
• Systemic Risk
• Reaction to the bull markets of 1980 and 1990
• Sarbanes Oxley
• Prosecutorial overkill
• Dont forget
• The market is global
• Law of unintended consequences

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So

• The future is upward and onward for hedge fund
  managers (and aspiring managers)
• Same old, same old for institutional investors
• Regulators are on their way
• Innovation, especially in fixed income will
  continue
• Convergence of traditional equity management and
  long/short long bias hedge fund management
• Future is good

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The End