confronted by its first big test since the start of the bull market
in 2003. Many investors, unnerved by the US subprime mortgage
crisis and the writedowns at a number of major banks, are becoming
risk-averse, particularly for exotic or complex financial
instruments, say private bankers. A potential shakeout appears to
favour the major hedge fund managers and those with a proven record
of performance.
New hedge funds are being set up at the slowest pace since 2003,
with almost all of the $164 billion of new investments going to
managers with proven records, according to Hedge Fund Research, an
industry tracker based in Chicago. About 1,200 funds will be
introduced this year, down one-fifth from 2006, it forecasts. The
20 biggest managers are estimated to control one-third of the
industry’s assets.
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The industry may have to lower its hefty management charges to
attract increasingly risk-averse investors. According to an Ernst
& Young (E&Y) survey of more than 100 hedge funds and funds
of hedge funds that together manage $900 billion in assets, hedge
fund managers expect to see a fall in the sizeable performance and
management fees they charge over the next two years. Eighty percent
of those responding indicated they expect cuts in incentive fees;
72 percent believe management fees will decline. The E&Y survey
comes at a time when it is widely expected that growing investment
by professional institutional fund managers in hedge funds will
exert downward pressure on fees.
Hedge fund managers normally charge 20 percent of their funds’
positive performance and 2 percent for costs of fund
management.
“With such vast amounts of assets under management, the capacity of
many funds is under stress and the ability to trade in the
marketplace, with a minimum market footprint, becomes harder and
harder,” according to E&Y, analysing the survey results.
Julian Young, a partner in E&Y’s UK hedge funds practice, said
that while pressures on fees may be downward, managers that
“consistently perform well” will be able to continue to charge the
fee structure they want.
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By GlobalDataPictet & Cie, the Swiss private bank with $16 billion invested
for clients in hedge funds, agrees that well-managed hedge funds
will remain an attractive proposition for clients. Hedge funds are
“branching out into the traditional asset management space” as
investors look for secure absolute returns, notes Pictet hedge fund
head Nicolas Campiche.
The E&Y survey notes almost two-thirds of the respondents
expected investor lock-up periods – the minimum time an investor
must commit to staying in the fund – to decrease before long. This
will potentially make their assets under management less
stable.
Providing some comfort to managers that they will continue to
attract high net worth money, Barclays Wealth questioned nearly 800
wealthy individuals and found that 21 percent indicated they
expected to invest in hedge funds. This was up from an average of
20 percent in surveys carried out previously.
It found that only 48 percent of respondents planned to buy further
investments in equities over the next three years, down from 64
percent previously.
