The next two years are expected to be tough ones for hedge funds, with the likelihood that many firms will be forced out of business, accord...

The next two years are expected to be tough ones for hedge funds, with the likelihood that many firms will be forced out of business, according to a study by the Centre for Economic and Business Research, a UK-based research consultancy. The CEBR said hedge fund manages experienced an awful first quarter, and are now 8 per cent poorer than they were at the beginning of the year. Although May could herald a turnaround in hedge fund returns, performance is likely to remain muted over the short to medium term, a fact that could see as many as 1,600 of the estimated 8,000 hedge funds worldwide out of business. The CEBR study said that the cumulative effect of widespread hedge fund failures is likely to keep interest rates lower than is generally expected over the next couple of years. The report also warned that hedge fund managers are allowed to take on too much risk in order to earn a profit, and more importantly, a bonus. “The tendency for hedge funds to take on excessive risk is exacerbated by reward structures for managers that are asymmetric - there is heavy gearing on high returns, while if a loss is made, the manager merely fails to collect a bonus.” The report added: “For investors looking for high risk high yield investments, may we recommend horseracing?" The CEBR estimated the number of hedge funds has grown from 2,000 in 1990 to 8,000 in 2004, managing assets of $1.1 trillion.