UBP cuts hedge funds, sees industry shrinking

GENEVA (Reuters) - Union Bancaire Privee has cut its exposure to hedge funds and industry performance has disappointed, while other assets look more attractively-priced, a top executive said.

Christophe Bernard, the Swiss-based firm's head of asset management, also told the Reuters Wealth Management Summit that the industry, estimated at $2.6 trillion, could shrink by one-third over the coming quarters as investors withdraw assets.

"The extent of what's happening this year is unseen in the industry," he said, adding the industry's problems are more drawn out than during 1998's demise of Long Term Capital Management and Russian crisis or losses it sustained in 2001 and 2002.

"Hedge funds are meant to produce absolute returns. If we say nothing happens (by the end of the year) it will be down 10-11 percent. The basic function of hedge funds will have failed."

He said his firm cut exposure to 20 to 25 percent from 30 percent at the end of last year and had also moved to more conservative or cash-generative hedge fund strategies.

His comments come during a particularly challenging time for hedge funds amid highly volatile markets.

Hedge Fund Research's HFRI index fell 4.68 percent in September, its second worst month ever after August 1998's 8.7 percent drop, taking the year-to-date loss to 9.41 percent.

Bernard also said that since January 2007 UBP had changed the list of hedge fund managers it invests with at a faster rate than ever before.

"It means we are trying to replace talent that doesn't understand the new environment with talent that understands it. It's a transition," he said.

"We have well-established firms, big ones, that in our opinion don't get it. And if we believe they don't produce the returns for our clients in the long term we don't want to be involved."

SHRINKAGE

Bernard also said the hedge fund industry could shrink by 25 percent over the next few quarters.

"It would be naive to think as the financial sphere contracts and everyone deleverages and runs for cash ... that the hedge fund industry would be spared.

"It is obvious to us that some strategies that have been thriving since 2002-03 are not going to be effective in the new environment."

Bernard also said other assets such as equities and corporate bonds looked more attractive relative to their risks compared with hedge funds.

"The risk premia for credit and corporate bonds that have begun to be available for equity and credit ... have begun to look very attractive," he said.

"Logically when equities and bonds become very cheap, or even cheaper than very cheap ... there is an argument when you can begin to shift your hedge funds and take more risk on the long-only side of your portfolio."

(For summit blog: summitnotebook.reuters.com/)

(Editing by Jon Loades-Carter)