By Pratima Desai
LONDON (Reuters) - Funds of hedge funds are at a crossroads and will soon have to decide whether to go for size or to offer niche products, Swiss bank Credit Suisse (CSGN.VX: Quote, Profile, Research, Stock Buzz) said on Tuesday.
The debate in the industry has partly been triggered by weak average returns of around 5 percent last year for funds of hedge funds, which invest in portfolios of hedge funds, compared with about 7 percent in 2004 and around 11 percent in 2003.
Another reason is overcrowding. Analysts say there are around 800 firms offering around 1,700 funds of hedge funds, which manage about half of the estimated $1 trillion to $1.5 trillion of assets held in the hedge fund industry.
Nils Tuchschmid, Credit Suisse's head of multi-manager portfolios, told journalists at the Reuters Hedge Fund and Private Equity Summit that consolidation was inevitable.
"The big boutiques will become bigger, and the smaller boutiques will become smaller," he said.
"I'm not claiming that the big boutiques will buy the smaller ones ... Some of the smaller ones may disappear ... Only the very specific ones offering niche products or niche strategies will be able to survive."
Tuchschmid said funds of hedge funds wanting an edge in the products they offer to clients would have to offer good products, creativity, resources, systems and research.
"You need resources to do that ... This will automatically lead to consolidation," he said. Continued...
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