Five years after the credit crunch, industry is still squeezed

Tue Aug 21, 2012

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Comment by Joy Dunbar, Editor of Absolute UCITS

Earlier this month an unhappy anniversary was celebrated.

Five years ago, on 9 August 2007, the credit crunch began. That date began a chain of events. It started off as a lack of trust between banks not wanting to lend to each other because they did not know which of them were dangerously exposed to subprime investments in the US.

Many other events have happened since then and are too numerous to mention in this blog. But one of the most significant events occurred more than a year later – the collapse of Lehman Brothers – which heralded in a new era in the hedge fund industry, which changed fundamentally during the global financial crisis and after. 

During this time, many investors ran collectively at once to exit funds. This resulted in some hedge fund managers 'gating’ investors or 'side pocketing’ portions of their funds (who knew what a side pocket was before 2008?) – all of which served to create a lack of trust and transparency in the hedge fund industry. And then of course, to top things off nicely, the Madoff Ponzi scheme was exposed.

The ripple effects of the crisis have been stark not just for the hedge fund industry but for the asset management world generally.

The macroeconomic environment has not supported a recovery back to pre-2008 levels in the financial services sector – instead, there have been volatile markets, a lack of liquidity, heightened fear, the eurozone crisis and little growth in the economy. All of which has resulted in investors being more cautious.

This has been compounded by increased financial regulation that has resulted in operational costs increasing.

2008 has been be seen by some as the worst ever year for the hedge fund industry – to some extent regardless of performance (which was still much better than equities at the time) – as hedge funds were also being collectively perceived, rightly or wrongly, as profiteering from the fallout of the global financial crisis.

Since 2008, the balance of power has increasingly swung towards investors. There has been a drive towards more transparency, a shift towards moving assets onshore, which has resulted in UCITS-compliant structures being widely used. Only time will tell if this has restored trust with investors.

Maybe on 9 August 2017, a decade after the start of the credit crunch, we will finally know what the long term impact of the credit crunch has been on the hedge fund industry and if investing in hedge funds is still considered 'respectable’ for investors. However, the only thing that seems certain is that more financial regulations will become the norm. 

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ISSN: 2151-1845 / CDC10004H

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