Thursday, March 26, 2009

Impact of Market Downturn on Hedgefund and Mutual Fund Industry

Both the industries have witnessed massive redemption. Their portfolios have shrunk due to the sudden fall in equities. Due to these, the overall portfolio sizes have shrunk. The industry will endure the following 5 changes.

1. Increase Fee Structure - Fees will rise to spread the cost to fewer investors.
2. Increased Consolidation - Industry will consolidate. Weak players will disappear. Weak Funds will disappear. strong funds and companies will strengthen.
3. Increase capital outflow and retail investment in stocks and bonds - With equities at decades low, retail investors are venturing into the stock and bond market in greater number.
4. Increased Regulation - Hedge fund industry has enjoyed relaxed regulation. That will be a luxury going forward. They will need to maintain higher capital to absorb risk. They will have to be more transparent with their methods. They will also be subject to more regulatory oversight.
5. Increased flight to ETF - ETFs are more tax efficient and regulated. Investors will fly to ETF to avoid the cost structure of mutual fund and hedge fund.

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