The online availability of forex pricing information strips banks of a competitive edge they enjoyed with the old, opaque pricing model, according to one of three former Bank of America execs who have started their own hedge fund firm with a portfolio focused on foreign exchange intraday trading.
Despite a slowdown in hedge fund creation early this year, David Greenwald, a partner in Scalene Partners of Westport, Conn., said now is the right time for independent firms to compete with banks in selling specific alternative investment products.
His firm, which was opened two months ago with $2 million of assets under management, enters the hedge fund arena after the product has peaked and many other former bank executives have returned to the safety of their bank jobs.
Freeman & Co., a research firm in London, reported that 33 hedge funds and 16 funds of hedge funds were started in the first quarter, 40% fewer than in the fourth quarter.
Assets in hedge funds were relatively stagnant in May. Data from the most recent Van U.S. Hedge Fund Index showed a 0.2% rise that month, and for the year through May 31, U.S. hedge funds returned 1.8% on average. By comparison, in the first five months of 2001, hedge funds grew 7.5%.
"The playing field has changed, the market dynamic is different," Mr. Greenwald said. "The competitive advantage banks used to have" in selling foreign exchange hedge funds "is gone." Pricing was opaque, and investors tended to use trusted banks, he said.
Mr. Greenwald said hedge funds, particularly one like Scalene's that focuses exclusively on foreign exchange intraday trading, have become more transparent as pricing has become available on the Internet. And this has made it possible for individuals to manage them outside of a bank.
"With Internet pricing engines allowing us to work with a very small back office, three guys could trade $300 million a day," Mr. Greenwald said. "There has been a lot of competitive changes in the market, and that hastened our decision to leave the nice, cushy world inside a bank and venture out on our own."
"The market is going through a period of consolidation, not saturation," said Larry Simon, the president of Ivy Asset Management, Bank of New York Co.'s hedge fund unit. "The rush to launch new products may have hit its peak."
John Pileggi, the president of the Mercantile Capital Advisors unit of Mercantile Bankshares Corp. in Baltimore and a former hedge fund executive who moved back to the bank channel, said it is natural to see executive movement back and forth as a business line matures.
As hedge funds generated interest from pension plans and institutional investors, Mr. Pileggi said, more banks began offering the product and, as the markets declined, began drawing back their top executives. But some of these executives have since headed back out on their own.
"I think there are cultural issues and a certain cycle to all of this," Mr. Pileggi said. "Hedge fund managers initially want to take their talent and the capital and leave banks and the bureaucratic lifestyle. But the attractiveness of these products to larger firms like a magnet pulled them back to the bank. Then some of them remembered why they left in the first place. This is a shakeout that will continue to play out."
Paul Aaronson, an executive managing director for portfolio services at Standard & Poor's, said that, because hedge funds are so loosely regulated, the industry ballooned almost too quickly. Hedge funds grew from 800 in 1997 to 8,000, with $550 billion of assets under management, today.
Mr. Greenwald said a lot of good and a lot of bad things are occurring, as with any new-product explosion. Perhaps long-short equity funds and convertible arbitrage funds have saturated the market, he said, but he sees few competitors for his forex fund.
"There is a lot of interest in alternative investments right now; the market is just trying to find the right definition," Mr. Greenwald said. "Perhaps the market has gotten bigger than it should have, but it is just in the process of taking shape." For now, he said, he and his two partners, Ken Kristensen and Todd Andrews, will focus on setting up shop.
