March 24, 2009 / 7:50 PM / 9 years ago

Big hedge funds' golden era fading

<p>Thomas Grossman, Founder of Union Avenue Advisors speaks at the Reuters Global Hedge Fund and Private Equity Summit in New York, March 24, 2009. REUTERS/Mike Segar</p>

NEW YORK (Reuters) - The golden age for super-sized hedge funds may be coming to an end as investors think about putting more money with smaller players, said an industry veteran who is setting up his own fund.

“I think the established hedge funds will get smaller over time because of redemptions, losses, and loss of talent,” Thomas Grossman, principal at Union Avenue Advisors told the Reuters Private Equity and Hedge Funds Summit in New York.

Armed with $100 million in assets, Grossman plans to make bets in emerging markets and raise as much as $300 million for his new fund. Previously he ran Aeneas Capital Management.

In recent years successful hedge funds have tended to be much larger than the amount Grossman hopes to raise and industry experts say managers generally need to have between $500 million and $1 billion to make their businesses work.

For example, Och-Ziff Capital Management Group LLC (OZM.N), one of only a handful of publicly traded hedge fund firms, invests $22 billion.

But Grossman, who once worked as a principal trader at SAC Capital Management -- one of the industry’s biggest hedge funds, which made headlines with outsized returns -- said last year’s industry shake-up is standing conventional wisdom on its head.

“We have seen this trend from family offices and other big investors where people are pulling their money out of the big funds and allocating it to a bunch of smaller players like me,” Grossman said.

Angry that the average hedge fund lost about 19 percent last year, investors pulled about $150 billion out of these loosely regulated funds last year, industry data show.

But money managers, including Grossman, are confident that pension funds, endowments and wealthy individuals are not fleeing the $1.4 trillion hedge fund industry for good. They are simply reallocating their money, he said.

“The cover-your-ass mentality of having to invest with the biggest guys has been broken down,” Grossman said.

At the same time, Grossman, whose resume also boasts a stint at Goldman Sachs Group Inc (GS.N), stressed that investors are not throwing caution to the wind by taking a chance on anyone who is ready to set up a new fund.

Indeed the opposite is true, Grossman said, describing the rigorous questions potential investors lob at him.

“You need brand name accountants and and independent service providers,” Grossman, who uses Credit Suisse and JP Morgan Chase as prime brokers and Rothstein Kass as accountants.

Reporting by Svea Herbst-Bayliss, editing by Gerald E. McCormick

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