UBS sees hedge fund assets shrinking

Alex Ehrlich, Managing Director, Global Head of Prime Services and member of the Board of the UBS Investment Bank, speaks at the Reuters Global Hedge Fund and Private Equity Summit March 23, 2009.

NEW YORK (Reuters) - Hedge fund assets will continue to shrink this year, falling as much as two-thirds from their 2007 peak, but investors will return and assets will rebound when the economy revives, Alex Ehrlich, global head of prime services at Swiss bank UBS, said on Monday.

Last year was the hedge fund industry's worst ever, as asset values plunged and investors pulled out record amounts of cash. These trends, which forced hundreds of funds to close their doors and some to impose redemption curbs, are likely to continue this year before the industry rebounds, Ehrlich said at the Reuters Private Equity and Hedge Funds Summit in New York.

"All this proves is that the hedge fund industry is cyclical," he said. "But the idea of the death of the hedge fund industry is crazy. The industry will rebound, though it will not rebound to peak levels."

Ehrlich, who runs one of the world's largest prime brokerages, said that in just the past year hedge fund assets have fallen from roughly $2 trillion to as low as $1 trillion.

"We expect it to decline further. We think if it's down 40 to 50 percent (now), it could be down 66 percent when it bottoms," he said. "But once it bottoms, assuming it's coincident with the beginning of an economic bottom, we expect the industry will grow again, very rapidly, from that base."

Prime brokers, typically parts of big investment and commercial banks, provide a variety of financing, stock-lending and back-office support to hedge funds.

Ehrlich, who prior to joining UBS in 2003 spent 22 years at Goldman Sachs, is optimistic that the industry will rebound sharply despite speculation that some investors will never return.

"We expect (assets) to double in however many years it takes. We don't think investors will abandon (the industry) in droves," he said.

(Editing by John Wallace)