Most Hedge Funds Don\'t Plan Ahead on Management: Study |
Date: Thursday, August 28, 2008
Author: Svea Herbst-Bayliss, Reuters.com
BOSTON (Reuters)—Hedge fund firms often pride themselves on being ahead of the curve on financial trends but roughly 70% lag behind on planning for their own futures, according to a study to be released on Tuesday [Aug. 26]. "Regardless of firm size, most participants have not taken all of the necessary steps to ensure a smooth transition in the event of a change in the senior management team," said Rick Flynn and Alan Kufeld, who provide tax, accounting and consulting services to hedge funds as principals at Rothstein Kass. Rothstein Kass sponsored the survey, which was conducted by wealth management experts Russ Alan Prince and Hannah Shaw Grove. The pair polled 349 U.S.-based hedge funds in recent months to assess how ready players in this loosely regulated industry are to handle change at the top. Reuters obtained an advance copy of the survey. While hedge funds used to be small businesses managing several hundred million dollars, the industry has grown up and many fund firms now oversee several billion dollars for big clients such as pension funds that want to see a succession plan. But most fund managers acknowledge they haven't thought that far ahead. Less than one-quarter of the respondents said they have agreed on a formal succession plan and fewer than 30% said they are ready to deal with the death of a managing partner, according to the data. "This lack of preparedness poses a threat to both the role and personal wealth of the principal and will almost certainly affect the other owners of the management company as well as investors in the firm's funds," wrote Messrs. Flynn and Kufeld about the results. Part of the reason many hedge fund managers have failed to think about what happens to their firm after they are gone is that death is difficult to "deal with from an emotional standpoint," the consultants wrote. Death isn't they only way to lose a key member of the team—disability and termination are other causes for disruption. But managers have not thought much about these either, even at a time when ever more hedge fund partnerships are breaking up. Even fund firms that think they are prepared are often not, the consultants found. "Our research suggests that these firms are overrating their level of preparedness, as nearly 60% have not reviewed the plan in three years or more," according to the report. For years, scores of young portfolio managers and traders who quit Wall Street firms to set up their own hedge funds focused mostly on establishing their businesses and little on how to exit it. Now their investors want them to look into the future and tell them what happens when they are gone, hedge fund managers and their clients have said. By Svea Herbst-Bayliss