UBS May Rue Its Hedge Funds Love Affair

Mark Haefele, global chief investment officer UBS

Mark Haefele, global chief investment officer UBS

Investors are pulling their assets out of hedge funds, making experts believe that the day of reckoning is looming for the industry. UBS may yet regret to have kept faith in the speculative financial products for so long.

Hedge funds have had their worst start to the year since 2008. Investors pulled out $15 billion in the first three months of the year alone as fund managers failed to meet expectations.

The industry's slow start hasn't prevented UBS from urging its clients to buy the speculative products. In light of the negative interest rates, hedge funds remained an option for investors with an appetite for a real return, Mark Haefele, global chief investment officer told«Bloomberg» in an interview last week.

Better Than Government Bonds

The UBS manager had to admit that the return since the start of the year hadn't been impressive. However, hedge funds helped diversify portfolios and their return-risk-profile was better than government bonds, for instance.

Switzerland's biggest bank isn't shy of promoting the hedge funds, which others perceive as overly speculative. Analysts at the bank in April wrote in a research paper for wealthy clients that the specialist funds weren't too risky or illiquid and that they aimed to demystify the instruments.

In its model portfolio, UBS increased the share of hedge funds to 20 percent from 18 percent – higher than any other big bank. The adjustment was aimed at a stabilisation in light of the edgy markets, the bank said at the time.

Hard Times Loom Large

Some say that the industry is in for hard times though. Tony James (pictured below), chairman of Blackstone and billionaire businessman, told «Bloomberg» that the day of reckoning was nigh.

Tony James 506

James expects the industry to shrink, with painful consequences. He expects the funds to lose as much as a quarter of its assets of currently $3 trillion over the coming 12 months.

Blackstone of course is active in the industry and known as the biggest contributor of assets to the industry. The New York-based company is issuing managers with capital to start new funds and is buying stakes in other hedge funds.

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