Benzinga's Daily Hedge Fund Briefing - January 14: Hedge Funds Could Lose Top Talent, Though Set For Bumper 2010 Inflows

Though hedge funds posted a strong turnaround and reached the $2 trillion mark in 2009, marking their best returns in 10 years, a number of firms are still vulnerable, which could have an impact on their ability to retain top talent, according to Heidrick & Struggles International (NASDAQ:HSII).

"It has been a tremendous turnaround year for hedge fund survivors, marking their best returns in over 10 years," says Claude Schwab, head of the U.S. hedge fund practice and a partner at Heidrick & Struggles. "By November 2009, the industry re-crossed the $2 trillion mark, and this was largely due to performance rather than net inflows."

"But this has been a Pyrrhic victory for the industry as a whole," says Schwab, who is one of the report's authors. "The fact is that more than 20% of hedge funds shut down in the past two years, with 1,500 liquidations in 2008 and 900 in 2009 – and those firms under $1 billion and underwater are especially vulnerable. This vulnerability will have a direct impact on talent flow in 2010; top talent seeks high-quality, stable firms."

The survey says that the U.S. hedge funds last year lost staff to endowments, sovereign wealth funds and the U.S. Securities and Exchange Commission, and the trend is likely to continue in 2010.

Veteran hedge fund and markets professionals are also in demand at the SEC, where a promise of increasing government enforcement and the creation of a new Division of Risk, Strategy, and Financial Innovation are leading to new hires, according to the survey.

However, the hedge funds are set to see solid inflows in 2010 after a strong performance last year virtually wiped out the heavy losses seen in 2008, Gottex (PINK:GTTXF) head of European business Max Gottschalk said on Wednesday.

Investors who remained invested in hedge funds through the financial crisis are by and large very pleased with how they have performed, and many who pulled their money out are now returning said Gottschalk, whose Swiss-based company manages almost $9 billion in funds of hedge funds.
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Hedge Fund Research also has reported that hedge funds gained 20 per cent in aggregate last year, making it the industry's best year since 1999, when hedge funds returned about 31 per cent.

Isaac Souede, Permal global chief executive, says that 2009 has turned out to be a banner year. 'A year ago, I said that when the industry has drawdowns, it usually comes back exceedingly strong for a period. In the beginning of 2009, people listened politely but didn't quite believe it, but that's what took place.'

Meanwhile, the fund of hedge funds arm of Hermes, Britain's largest pension scheme manager, has rallied peers with more than US$15 billion (S$20.8 billion) in assets to get agreement on how to better handle the managers running their money.

In one of the first such meetings of its kind, Hermes BPK Partners gathered the working group together at its London offices on Tuesday to kickstart a project it hopes will improve the disclosures made by hedge funds. 'The group will be discussing many issues facing the industry, including those important to Hermes BPK Partners, such as 'smarter' transparency,' said r Matteo Perruccio, chief executive and founding partner of Hermes BPK. Source