Staying positive

Date: Tuesday, February 17, 2009
Author: Laurence Fletcher, Reuters.com

There seems to be an endless wave of bad news hitting the hedge fund industry at the moment — gates and suspensions, record poor performance, the Bernard Madoff scandal and so forth – but there are still one or two reasons to be positive.

According to a survey of institutional investors by alternative assets data group Preqin, conducted in January (and therefore after the alleged Madoff fraud came to light), only 8 percent said they were no longer confident about hedge funds and would reduce investments.

By contrast, 26 percent said they would be increasing their allocations this year.

This appears to be a more positive picture than for high net worth individuals, who, according to some anecdotal evidence, have become more cautious on hedge funds.

Institutions such as pension funds, in contrast, tend to have time horizons running into decades, so a year of bad performance is not necessarily the be all and end all.

They have also seen equities, which constitute a far greater portion of their portfolios, plummet last year, leaving hedge funds, relatively speaking at least, looking quite good.

Having followed wealthy individuals into hedge funds and helped fuel the industry’s massive growth of recent years, they could end up supporting it through the difficult times.

But the survey also highlights some less appealing trends for hedge fund managers.

The industry’s lucrative 2 and 20 fee structure looks more and more under threat, with around 35 percent of institutional investors saying they felt more confident to negotiate fees.

And some investors in the survey said they would no longer invest in funds of funds because they didn’t think they were value for money.

For a section of the industry already under pressure — for performing even worse than single-manager funds, after a huge rise in the dollar hit cash reserves and because some fund selectors failed to spot Madoff — this is yet another ominous sign.