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Hedge Fund Veteran Sees A Shakeout Ahead

For the first time, more hedge funds will fail this year than are originated, according to Philip Duff, of Duff Capital Advisors.

In a rare interview with CNBC, Duff said the difficulty in gauging the health of banks has made it a challenging year for the fund industry.

"The dream of starting a hedge fund has been an enormous pull for people coming in off the streets," he said. "At the same time, delivering a consistent risk-adjusted return ... is not an easy thing to do."

Yet Duff said the future continues to be strong for hedge funds. He welcomed more government regulation and predicted that as investment banks continue to experience problems 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," he said. "I do think there will be more regulation, and I view that as a good thing."

He said hedge funds are ultimately a great investment despite the risk with which the vehicles are traditionally associated.

"The reality is the vast majority of hedge funds frankly are considerably less risky than owning a large, diversified portfolio of common stocks," Duff said. "Perception and reality aren't always the same."

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