US Headed For 'Protracted Downturn'

Source : The Straits Times, Oct 2, 2008

THE United States economy is likely to face an extended slowdown, say two hedge fund experts.

Mr John Rowsell, chief executive of US-based Glenwood, noted that the credit crisis differs from previous market shocks, such as the bear market following the bursting of the dot.com bubble in 2000, because it is 'more protracted'.

The question now is whether the downturn will be U-shaped or a more drawn-out L-shape, said Mr Rowsell, who is here to visit clients.

Singapore-based Timothy Peach, head of sales for Man Investments, a global alternative investments manager, agreed: 'We could well be in an L-shaped recession.'

But he noted that the recovery may also take place sooner than in the case of Japan, as the US government has 'taken action much more quickly - one year into the crisis'.

Japan took five years to act and the downturn lasted about a decade.

Man Investments owns Glenwood, which manages US$7.4 billion (S$10.6 billion) of assets in funds of hedge funds.

Mr Rowsell said he expects to see a 'stabilisation of risk in the market' as excess leverage - which caused some of the problems - is removed from the system.

Leverage is likely to be 'reduced dramatically' at Goldman Sachs and Morgan Stanley after they lower their credit levels drastically - in line with regulations after converting from investment banks to commercial ones. But it will still take Washington's US$700 billion bailout plan to restore stability, he said.

The volatile situation is not being helped by hedge funds reportedly grappling with an outflow of investor funds. Mr Rowsell noted that there is likely to be a 'consolidation in the hedge fund industry' as investors opt to put their funds with large funds that have stronger balance sheets, while smaller, marginal players will be forced to exit.

Responding to a question about Asian investors' interest in Man Investments' funds, Mr Peach noted that the group has continued to see a 'high level of interest', apart from the past month, when investors have been 'frozen like rabbits in the headlights'.

High net worth individuals are now 'prepared to pay a premium for capital protection', so Man Investments has seen 'strong inflows' into those products, he added.