Hedge funds need to be creative to keep investors

Date: Tuesday, April 8, 2008
Author: Svea Herbst-Bayliss, Reuters.com

NEW YORK (Reuters) - Hedge fund managers will have to become more creative to hold onto billions of dollars now that their investors are fretting about lackluster returns and want the money back, a top industry executive said on Monday.

"Managers are working harder than ever for their fees," Tanya Styblo Beder, who ran Citigroup's Tribeca Global Management hedge fund and is chairman of risk management advisory firm SBCC Group, said at the Reuters Hedge Funds and Private Equity Fund Summit.

Managers are not only jetting across the country to plead with endowments, family offices and corporate pension funds to stay put, they are also cobbling together plans designed to deliver handsome payouts to skittish investors.

This marks a change in the $1.8 trillion hedge fund industry where assets had doubled in the last four years and managers had little problem collecting their 2 percent management fees plus their 20 percent performance fees.

But now that many prominent hedge funds are nursing heavy losses and the average fund has lost 2.8 percent in the first quarter, according to data from Hedge Fund Research, managers are facing a trend few have ever seen in their careers.

Redemption notices are piling up from nervous investors, investors and managers have said. At hedge funds, money is often locked up for months and even years and getting out can be a tricky process that requires long-term planning. Putting in a redemption notice might not mean that investors will exit, but it gives them the right to. Beder noted that more people are using this option now.

"Investors are putting redemption notices in right and left and this is a tough problem for managers to analyze," she explained, adding that "managers' butts are strapped to planes as they go talk to investors."

Managers are also wrestling with whether or not to use their gate provisions which would allow only a certain number of investors to leave, but that would signal serious distress at the fund, she said. 

Keeping investments might require a lot more than talk, Beder said, noting that innovative formulas are sure to spring up in the industry as managers try to hold on to their capital.

For example, hedge fund managers may lock up investors' money for longer in exchange for giving them bond-like investment returns with an equity investment kicker, she said.

"The next period is going to be very exciting," as financial engineering is expect to kick into high gear in an industry that has already long prided itself with attracting the best and the brightest managers.

Still, some investors may not be convinced and will walk away, something that may force some large hedge fund firms to cut their staff and make other reductions, Beder said.