MONACO Hedge fund managers left their annual get-together on Thursday with much to worry about, as volatile markets, looming regulation and tax changes block the industry's recovery from the global economic crisis.
As the Mediterranean resort was hit by stormy weather this week, managers attending the GAIM hedge fund conference focused on the problems that could hit their businesses rather than the past year's client inflows and bumper 20 percent returns.
"There are reservations, and concerns have not yet been rectified... The industry's recovering but has not yet recovered," Ken Heinz, president of Hedge Fund Research (HFR), told Reuters.
"The mood is better than a year ago but it's not as good as several years ago."
Hedge funds lost 2.73 percent in May, according to Credit Suisse/Tremont, wiping out much of this year's gains and raising fears of an extended period of turbulence.
The losses were the biggest since November 2008, near the nadir of the credit crisis, according to Hedge Fund Research, which provides another industry index.
Convincing clients to part with their money continues to be tough, delegates said. The $30 billion or more of net inflows since last summer has not gone far in plugging the gap left by $330 billion of outflows in the year to June 2009.
"(The mood) is mixed, to say the least," Aarnout Snouck, director at AXA Investment Managers, told Reuters.
"May changed the perspective for a lot of managers. Everyone believes we're in for quite some months of substantial volatility... Raising money is very tough in this environment."
Man Group (EMG.L) CEO Peter Clarke warned delegates of "a world of volatility and uncertainty," while Mike Powell, head of alternative assets at 30 billion pound ($43.99 billion) pension fund USS, told Reuters he was moving into short-term computer-driven funds due to concerns about the market.
Executives are also worried by the prospect of tougher regulation, particularly the European Union's plans to regulate managers and the possibility of a widening of Germany's ban on naked short selling.
"The hedge fund industry is going to be the subject of some really rash and nasty and intense regulation," said Rick Sopher, chairman of fund of funds LCH Investments. "There are going to be some really difficult moments for our managers."
Europe's proposed Alternative Investment Fund Managers directive (AIFM) is still being debated and could affect the ability of hedge fund managers outside Europe to sell into the bloc.
Olwyn Alexander, head of Irish alternatives practice at PricewaterhouseCoopers, told Reuters that many U.S. hedge fund firms were postponing business decisions until European regulation was resolved.
If regulation turns out to be tough, it could provoke a backlash from the United States and could even divide the European and U.S. industries, Alexander said.
"Regulation and tax are the two biggest challenges the industry faces. Uncertainty is a huge issue for the industry currently," she said.
"You may see a bifurcation of the industry. It's increasingly expensive to manage money in Europe, and it may make sense to have a European product and a fund for the rest of the world."
Meanwhile, accountants are fretting over U.S. tax proposals
which may require much more detailed information on fund investors and which could penalize non-compliant funds.
But not everyone was gloomy.
One Swedish-based statistical arbitrage manager, for example, told Reuters he had found investors more open to his fund than he had expected.
And FRM Capital Advisors' Patric de Gentile-Williams said his funds had raised a net $70 million so far this year and investors such as pension funds and sovereign wealth funds were once again looking at seeding small hedge funds.
(Editing by Karen Foster)