With the increased institutionalisation of hedge funds, managers are struggling with meeting the demanding requirements of institutional investors as well as regulatory compliance.

Investors are trying to avoid losers rather than pick winners, according to Richard Watkins of CEO of Liability Solutions, an independent placement agent. He believes that most of the short portfolios of hedge funds “are littered with disasters".

Watkins was one of the guests on the most recent Naked Short Club radio programme. Other guests included Daniel Shapiro, founding partner and a member of the investment management and tax groups at Schulte Roth & Zabel/Lincoln Vale; Wallace Wormley from Ospara, an investment consultancy practice advising institutional and family offices; Michiel Swaak, managing director of QIC Quantitative Management and responsible for the QIC Asia Pacific Market Neutral Fund; Sam Jones from the Financial Times; City poet BH Fraser; and Robert Picard, US head of managed account development for Lyxor Asset Management, who is based in New York.

During the hour-long show of music and talk, Shapiro led a discussion on the implications of the institutionalisation of the hedge fund business. Some of the points raised concerned the concentration of assets in a relatively small number of funds as well as the difficulties in raising money for smaller, independent ventures. Panellists questioned whether there was still room for entrepreneurial boutiques, particularly as hedge funds need to comply with the more rigorous due diligence and other requirements of institutional investors as well as a raft of new regulations.

Watkins looked at the implications of the exodus of prop traders from the investment banks and the tricky question of what are the minimum assets under management that a start-up hedge fund needs in order to be viable. The discussion centred on the problem of finding seed capital and strings that may be attached to early investment money in new funds.

Swaak from QIC questioned whether quantitative hedge funds are attractive for Asia-Pacific region investors and if being present in the region makes any difference when trying to raise assets.

He said despite challenges the region offered some of the best opportunities. Swaak also wondered if Australia is in danger of contracting the ‘Dutch disease’, the relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector.

Wormley from Ospara looked at the events in the Middle East and Japan and what impact they were having on market sentiment or action in the US, particularly focusing on the divergent approaches to interest rates between the Federal Reserve and the European Central Bank.

From the US, Lyxor’s Picard explained the concept of ‘structural efficiency’ for hedge fund investing.

Other topics discussed on the programme included third-party marketing in the US, active versus passive management, the spate of insider trading cases highlighting the problems of defending legitimate attempts to share information and options about the market and particular stocks and the regulatory over-reaction.

The next live edition of the Naked Short Club will be broadcast on April 11, 2011.

Feedback on the show should be directed to presenter and host Dr Stu.

The N@ked Short Club broadcasts on Mondays from 21.00-22.00 GMT and is replayed from 15.00-16.00 GMT every Thursday on not-for-profit ResonanceFM at 104.4FM in London or via the web.

Resonance 104.4FM is a not-for-profit, UK-registered charity supported entirely by grants and voluntary donations.