Despite Subprime Fallout, Executive Opportunities at Hedge Funds Growing Amid Near-Record Inflows
Hedge funds are seemingly immune from the subprime fallout. There has been a lot of suffering in the market for mortgages to people with less than stellar credit histories. Fed Chairman, Ben Bernanke, warns that the situation with subprime loans will likely grow worse before improving. Bernanke says there will be “significant financial losses” from risky mortgages, pointing to estimates as high as $100 billion. But despite the pain, the hedge fund industry continues to see near-record inflows and some savvy hedge funds are posting big gains. Executive recruiter, A.E. Feldman, says the news presents significant opportunities for investment professionals seeking hedge fund jobs.
The hedge fund industry continued to see near-record inflows of new money in the second quarter, adding $58.7 billion in assets, according to Hedge Fund Research (HFR). This follows record inflows of $60 billion in the previous quarter. Overall industry assets have now hit a staggering $1.74 trillion.
This comes just as last month investment bank, Bear Stearns, had to inject $1.6 billion into one of two internal hedge funds that suffered big losses in the subprime mortgage markets. As home values have fallen in parts of the country, and interest rates have risen, many of these borrowers have been defaulting. In fact, delinquencies on U.S. subprime mortgages rose to a 10-year high this year. Bear Stearns stated that investors in its two hedge funds that recently failed would get little if any money back because of “unprecedented declines” in the value of securities used to bet on subprime mortgages.
The subprime fallout however is contained, according to Kenneth Heinz, president of Hedge Fund Research. Subprime mortgage exposure has not yet resulted in a generalized, systemic impact on indexes of credit-focused hedge funds or on the broader hedge fund universe. Specific instances of weakness are at least partially offset by the performance of funds which have minimized their exposure to subprime mortgage credit or, in some instances, maintained short exposure to many of these securities, says Heinz. Strong trends in both the absolute level of yields as well as favorable movements in the slope of the yield curve, he adds, “contributed to the performance of both fundamental and systematic macro strategies.”
In fact, hedge funds betting on falls in bonds linked to U.S. subprime mortgages raked in returns of almost 40% last month as they profited from the fallout. A $2 billion fund run by New York’s Paulson & Co tops the list, rising about 40% after fees in June thanks to its bets against subprime mortgages. Other hedge funds following similar strategies produced returns of about 28%.
So, it seems that despite the problems that the subprime meltdown has created, funds have not been deterred from investing even more in hedge funds. Institutional investors are expected to inject more than $1 trillion into hedge funds by 2010, according to a study by the Bank of New York and consulting firm Casey, Quirk & Associates. A.E. Feldman says investment professionals seeking hedge fund opportunities are in a position to benefit greatly from this trend.
