market folly

We here at Market Folly are always looking to expand our coverage of various topics scattered throughout the hedge fund industry. One bit that has intrigued us is the emergence of more female fund managers in the industry. While there are a few prominent hedge fund women (Karen Finerman on CNBC is probably the most visible), they are still playing on a playing field primarily occupied by males. At the same time, the future of the hedge fund industry has been a pressing issue lately as well, given how things have played out with the crisis. As such, we thought it would be poignant to combine the two and to take a look at the current hedge fund landscape through the eyes of some females involved in the industry.

Below is a guest post by Liz O'Donnell of TheGlassHammer.com, an "award-winning blog and online community created for women executives in finance, law, technology and big business."

New data from Hedge Fund Research, Inc., (HFRI) shows assets invested in the industry increased by $100 billion in the second quarter of 2009, ending at $1.43 trillion. This is the first quarterly increase in assets since second quarter of 2008. HFRI attributes the growth to gains shown during the quarter. The HFRI Fund Weighted Composite Index returned 9.13 percent. This is the best quarterly gain since the last quarter of 1999, although still below the highest peak, reached in 1997. And while investors are still redeeming capital, the pace of the redemptions has slowed from recent years.

But looking past the most current returns, what does the future hold for the hedge fund industry given the tremendous impact of the global financial crisis and amid discussions of government regulations? And what about the outlook for women? Will the recent inflow mean more opportunities or will women still be virtually missing from the industry this time next year?

“Right now hedge funds are a hot topic,” says Kelly Chesney, principal and co-founder of Pluscios Management LLC, a women-owned investment management firm. “I think they really got some negative press and sentiment last year and they are starting to turn around. There is more publicity when hedge funds don’t perform well, but they did much of what was expected.”

Following what she calls “an economic tsunami”, Chesney, and others, see consolidation and regulation as key issues that will impact the industry. “I think it will be choppy and we’ll have various events happen over the next few years. We need to be nimble and adaptive and hedge funds are good at that,” Chesney says.

Certainly the industry has already seen the beginnings of consolidation. After a rapid growth spurt, (the number of funds grew from 610 in 1990 to approximately 9,000 today⁾ 15 percent of funds have disappeared. State Street, in its recently released report “Alternatives: New Views of the Hedge Fund Industry” says that half of all hedge funds may disappear before the crisis shakes out.

Eloise Yellen Clark, founder and CEO of OmniQuest Capital LLC, agrees consolidation will be a continuing trend. “More and more money is going to the bigger players where traditionally there was a bunch of little players. It gets awfully expensive for smaller (funds) to survive.”

As far as what the future holds, Clark says, “Everybody’s talking regulation. I really don’t think it’s a big deal and I think it’s a good idea.” Clark points out that many hedge funds and many managers are already registered with the SEC. She believes more regulation around the issue of transparency would be valuable. Of course, just how far the government takes regulation could be an issue. “On the whole, reasonable regulation that respects fair markets is good. Transparency is good. But limiting the ability to buy and sell is bad,” said Clark.

Chesney says “absolutely” regulation will be a factor moving forward. “It’s not like there hasn’t been regulation.” But that regulation could increase. “It depends on what it is,” she says. “It could be wide ranging — from every fund must register—or it could be a ban on short selling.”

Some funds are “hedging” their bets. Aimee McCarty, marketing director for Ascentia Capital Partners, LLC, says her firm closed its hedge fund and now offers a mutual fund. According to McCarty, the new product combines the benefits of hedge funds with the features of mutual funds to offer a product that is “regulated, transparent, and liquid.” AQR Capital Management LLC added a mutual fund to its product offering earlier in the year.

Diversification might spell survival for some financial firms. Chesney believes it will get more expensive to run a fund, as compliance with regulations will add a new level of management. “There will be a higher barrier to entry,” she says.

That high cost of entry might not bode well for women. Already, there are very, very few women in the hedge fund industry. Currently only three percent of hedge funds are led by a woman. A recent report from The National Council for Research on Women, which we reported on here , asserts that one of the major reasons there are so few women in the industry is that gaining access to capital is harder for women than it is for men.

Says Chesney, “Typically women who get frustrated in other industries go out and start their own thing. But it’s tougher for women on Wall Street (because of) getting assets to manage.” None the less, Chesney is hopeful about the future of women in hedge funds. “I think there are going to be a lot of opportunities.”

Says Clark, who currently sees very few women in the business, “It’s my belief that women are different in business than men. Any organization that combines that is optimal.”

Chesney agrees. “Key in any fund management is diversification.” Whether that diversification extends beyond the fund and to the fund managers, is still to be seen.