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CEO of Citigroup's Tribeca Hedge Fund - Number of hedge funds will shrink

According to this Reuters story, Tanya Styblo Beder, chief executive of Tribeca, Citigroup's single manager proprietary hedge fund unit, said recently at a symposium held in Monaco on high-performance investing, "There are 8,000 funds today and these will go down dramatically to 5,000 or fewer over the next five years and there will be a bifurcation in capacity." She suggested that rising cost structures and short-lived market trends will divide the industry ove the next five years between boutiques and very large multi-strategy funds.

"Such a decrease will stem from rising cost structures as you will need a lot of scale to survive," she said. Alternatively, one will survive by doing something unique very well. Styblo Beder said such boutique hedge funds would specialise in areas such as trades linked to catastrophic events, insurance derivatives and credit arbitrage. Very large funds would focus on multi-investment strategies.

What was perhaps most striking though was this comment: "The nature of market trends is changing and it will become increasingly difficult to survive. Three years ago trends were months long and slow moving. Now the top 10 to 20 trends tend to be less than four weeks and most of the money is made in the first 72 hours -- how do you trade that?" she said. Ms. Beder strongly reinforces the value of being a first mover and the ability of hedge funds therefore to rapidly spot and profit from mispricing opportunities. Such actiuvity is generally reducing the volatility of financial markets overall and ultimately making trading harder for the hedge funds themselves, she added.

As a result, past investment performance is becoming increasingly less of a guide to future market trends, and hedge funds will have to adopt a more forward-looking approach with greater tactical asset allocation. "I don't think the party is over. I just don't believe that there will be markets with very high returns for long," Styblo Beder said. "A good portion of future returns will come out of portfolio constitution, and the current industry is not structured to do that very well. People are going to get a lot less micro," she said.

Toomre Capital Markets ("TCM") wonders whether investors, and particularly today's hedge fund managers, truly appreciate how much the cone of successful return strategies is narrowing. Ms. Tanya Styplo Beder's comment about the nature of market trends is quite telling. Do people yet really understand that there are too much investment dollars chasing arbitrage opportunites? This almost crazy hunt for return is causing people to do things that they would not do in more rational times. Is anyone asking what the value of cash and liquity are? Has everyone forgotten that little phenomena called "liquidity risk"?