AIMA Chairman rebuts Sunderland comments on hedge funds

Date: Thursday, May 8, 2008

Christopher Fawcett, Chairman of AIMA, has robustly rebutted the misleading statements on hedge funds made recently by CBI president John Sunderland.

The comments by Sunderland, who is also chairman of Cadbury Schweppes, were made at an investor relations conference last week.

Sunderland set his sights on a wide range of targets, from institutional investors to hedge funds. He attacked investment banks, institutional shareholders and hedge funds for focusing on the short term, a lack of transparency and an unwillingness to apply the same standards to their own businesses as they did to the companies they owned. He said: "The governance spotlight has glared remorselessly upon the corporates over the last five years. That light is long overdue in illuminating some of the more opaque practices in the institutional investor and banking sectors."

Sunderland also suggested that there was price fixing among hedge funds, with most funds charging a standard 2/20 fee (2% management fees plus 20% of profits).

Speaking yesterday to Hedgeweek, Fawcett, who is also senior partner at London-based Fauchier Partners, dismissed Sunderland's suggestions of price fixing as "factually incorrect." He said that in practice management fees ranged from 1-3 per cent and the profits share from 15-30%.

Fawcett added that hedge funds provide much-needed liquidity and depth to capital markets.

He also noted that hedge fund managers delight in taking a contrarian view, and often their stance on a corporate issue differs from that of other long-term investors. He said: "Many hedge funds also focus on buying out of favour stocks - the markets should be grateful for that - hedge funds will be buying when no-one else does."

To label all hedge funds short-term traders, for example, is to misunderstand the nature of the business. Some arbitrage funds, for example, are structured to focus on very quick returns, but others are looking for long-term value opportunities. Hedge fund managers are often smart and articulate and, although some chief executives may not like talking to them, they often ask the most probing questions at investor roadshows.

While that approach can lead to conflicts with other types of investors, their analysis can also influence the institutions, as in the recent battle over Deutsche Börse's aborted bid for the London Stock Exchange. While the hedge funds made the running on opposing the deal, it was not until a couple of the large long-only funds - among the largest in the world - joined in that the opposition was taken seriously, showing an alignment of interests among these investor groups.

Fawcett said: "Much attention is currently being given to the so-called interference by hedge funds in matters of corporate governance and debt restructuring, but the role of hedge funds as activist shareholders upholding the interests of investors is completely overlooked - hedge funds are negotiating for better shareholder value and as such they are frequently supported by large institutional shareholders as indicated by the Deutsche Börse affair. It seems probable that shareholder activism led by hedge funds and such activist investors as CalPERS and Hermes is set to grow."

Fawcett concluded: "It is inevitable that a fast-growing industry will attract more attention from the lay press along the way, and matters are not helped by the fact that hedge funds are restricted by regulation in what they can say about themselves, but we all need to better understand the positive role played by hedge funds in the markets."