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November 09, 2005
Hedge Funds and their impact in the Investment Sector
Since the first hedge fund was started in New York in January 1949, the concept has had an upward growth graph and has amply demonstrated through the decades that it is a potent force in the investment sector. In recent times, hedge funds have helped several brokerage firms to remain operational, and have become an integral part of institutional equity trading.
Experts feel that brokerage firms prefer hedge funds because the traditional money mangers are increasingly succumbing to regulatory and board pressures and are thus forced to cut their commission rates. According to Seth Merrin, CEO of Liquidnet, the last five years have seen a sharp decline in the long-only volume from traditional money managers. This decline has been precipitated by the fact that hedge funds offer higher margins to full-service brokers, are able to short stocks, and have recorded a rapid annual growth rate of 17 percent in recent years. In terms of numbers, there are about 7,000 hedge funds operating in the market today.
Rob Hegarty, who oversees the securities and investments practice at the Tower Group, feels that hedge funds are taking charge of the industry by introducing fresh technology and market strategies.
Initiatives by leading companies show the influence of hedge funds in their business processes. For example, Fidelity Investments opted for hedge fund executive Brian Conroy to manage the company's equity trading department; Janus Funds declared intentions of adapting the hedge funds functionality of performance-based management fees; and Goldman Sachs and Morgan Stanley have been influenced by hedge funds to expand trading tools and functionality on their front ends. Trading events have shown that hedge funds have influenced brokers and even traditional money managers. In effect, hedge funds perform a role similar to that of Nasdaq wholesalers in the 1990s.
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