Institutional Investor's Alpha Magazine - September 2008 - (Page 28)

Joel Press innovation of hedge funds. That would be a mistake in either the U.S. or in Europe. I don’t see increased government control as a trend. Are activist funds a source of concern? Activists have existed forever. They’ve had different names. In the ’80s they were called raiders. But activists serve a role. There’s a place for everyone in the market. What’s your take on the current extent of globalization of hedge funds? Real hedge fund markets haven’t fully developed in any major cities other than New York, London and Geneva. There are pockets of hedge fund activities in other U.S. cities. Most people don’t realize Minneapolis is a signiﬁcant hedge fund city. San Francisco, people do realize, is. You can’t say that Beijing is a major hedge fund city. There are a number of hedge funds in Japan, mostly in Tokyo. There are a number of hedge funds in South Korea, in Taiwan, in Singapore. There are pockets every- cent supported by wealthy individuals. Wealthy individuals still participate, but they are dwarfed now by the institutional market — the pension, endowment and foundation markets and the sovereign market. The very distribution of wealth is changing. There’s new wealth in China, new wealth in India. At some point these economies will invest in alternative products like real estate, oil and gas, and alternative energy. But there will always be the wealthy individual looking for innovation. Institutions also are becoming more entrepreneurial as they look at the percentage of allocation to alternative investments, not just hedge funds but commodities, energy, alternative energy, real estate, oil and gas, private equity and venture capital. Are hedge fund investors more sophisticated today? “Prime brokerage is about relationships. The pricing is not the key factor.” — JOEL PRESS The “high net worths” are quick, and their due diligence is spot on. Within every category of pensions and endowments, there are different levels of sophistication. It takes a long time for endowments and pension funds to make their decisions because their due diligence processes take much longer. What’s driving the prime brokerage business? where, but they don’t have the breadth and depth that London and New York have, that’s for sure. But globalization is going to continue. The sovereign wealth funds, as they grow, will start to bring some business in-house, ﬁ rst by trading, then by running hedge funds. They will run their own money, as Harvard did for awhile. I think that’s going to be a trend. Will it develop in India and China? Yes. As the markets mature and the people get more knowledgeable, you will see the spin-outs of hedge funds from the banks in those countries. I could see them starting in Mumbai and then Beijing or both. But it’s going to take a long time, probably ten to 15 years. London developed ten to 15 years behind New York. The rest of the world will take a lot longer. Where else do you see the hedge fund industry blossoming? What drives prime brokerage is technology and the ability to deliver ﬁnance and great service. Prime brokerage is about relationships. The pricing is not the key factor. It is delivering great service and being there for your clients when they need you. Anyone can provide ﬁ nance. But it’s much more about understanding a client’s business and needs. Deep pockets don’t matter? Brazil will likely develop into a market, as I anticipate will Argentina. Chile will develop into a market. I don’t see Mexico yet developing into a hedge fund market. Whether it will happen in Africa, I don’t know. There are a lot of hedge funds in South Africa and also a number of funds of funds. I am going to guess there are as many as ten large hedge funds centered in South Africa. Has the typical investor proﬁle changed? Deep pockets help. The banks, for example, have different kinds of pockets than investment houses, and banks have different tolerances for different kinds of leverage. As the industry has grown, the needs for ﬁ nance have changed. Now it’s almost impossible for anyone to have just one prime broker, because you should have two or three, depending on your size and how you use leverage. You have to go with those specialists according to your needs. BNP just bought Bank of America’s prime brokerage business, I suspect, to grow it. JPMorgan took over Bear Stearns’ prime brokerage business. I believe they bought it to grow it. There’s a whole bunch of prime brokerage ﬁrms that have been started in the past four years to specialize in smaller hedge funds that the bigger ﬁrms may not have the ability to service. I still see the prime brokerage business as robust and vital and as a growth business. Are spectacular hedge fund returns sustainable? Hedge funds, when they started, were almost 100 per28 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2008 I cannot predict returns, but I do believe that hedge funds are the best of breed and that they will ﬁgure out ways to do the best rates of return. Do I think they will beat the normal markets — whatever that means? Yes, because they are unique in what they do.

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - September 2008

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

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