Expect to see more hedge fails fail this year than are originated, says Philip Duff of Duff Capital Advisors in a CNBC interview.
Duff, the former COO of Tiger Management and former CFO of Morgan Stanley, says there is still a strong demand for hedge funds. But today's hedge funds will have to figure out how to generate high quality returns and advice in addition to managing money.
"The dream of starting a hedge fund has been an enormous pull for people coming in off the streets. At the same time, delivering a consistent risk-adjusted return ... is not an easy thing to do," he told CNBC.
The days of a "three men and a Bloomberg terminal are over," Duff says.
With the debacle of the financial health of banks, hedge funds have faced even greater scrutiny and have had a difficult year, he says.
In fact, Duff predicts that 2008 will be the first year that will see more hedge funds go out of business than start up.
Even so, Duff says the prospects for hedge funds continue to be strong. He welcomes more government regulation and predicts that as investment banks continue to experience problems, hedge funds will continue to grow.
"I think the hedge funds will take over a lot of the roles of investment banking in the basic function of intermediating capital and intermediating risk in the marketplace.
"I do think there will be more regulation, and I view that as a good thing" Duff says.
In the next 10 years, successful hedge fund firms will have over $100 billion and multiple funds, he says.
While hedge funds have had bad reputations in the past, most of them are less risky than owning large diversified portfolio of common stocks, Duff says.
Hedge funds are ultimately a great investment despite the risk they're traditionally associated with, says Duff.
"Perception and reality aren't always the same."
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