Investors and hedge funds at odds over importance of fees and regulation

Date: Tuesday, March 31, 2009

Investors regard fees and regulation as much more important than hedge funds do, according to a survey by IRC Conferences/Terrapinn.

While 43 per cent of investors rated the issue of fees as "very important" in reviving enthusiasm, only 14 per cent of hedge funds did so. It is not simply lower fees that investors want, but fees which are better structured, to align more fund managers' interests closely hedge with those of investors.

While all categories saw better self-regulation as more important than statutory regulation, the difference between investors and hedge funds was again marked. Thirty two per cent of investors see statutory regulation as "very important," but only 13 per cent of hedge funds believe it to be so.

The survey also found that 80 per cent of hedge fund investors continue to believe that hedge funds can provide good, long-term returns. Only 20 per cent of investors said that recent global events have shaken their belief in the hedge fund industry.

The survey, which was conducted among 273 institutional investors, hedge fund managers and service providers from around the world, found that 39 per cent of investors believe that the current depressed markets and heightened risk premiums offer a great entry point for fresh investment. Unsurprisingly, hedge fund managers themselves are even more optimistic, with 55 per cent stating that the current environment offers exceptional opportunity.

Investors, fund managers and service providers all agree the industry needs better transparency (95 per cent, 97 per cent and 97 per cent) and stronger internal risk, compliance and audit functions (93 per cent, 96 per cent and 100 per cent).

Both investors and hedge funds acknowledged that independent administrators and custodians are essential (87 per cent and 92 per cent respectively) and that a greater match is needed between hedge fund terms and liquidity (85 per cent and 80 per cent.) They also agreed that due diligence is more important than they realized (76 per cent and 73 per cent).

However, the survey suggests that hedge funds may have to wait until 2010 for net inflows to the industry to restart. The majority of hedge funds expect net inflows to the hedge fund industry to commence in the second half of this year, but most investors do not expect this to happen before 2010.

Unsurprisingly, the hedge funds strongly believed that money entrusted to their care needs to stick around longer term. As a result, hedge funds are more enthusiastic than ever to attract capital from long-term, institutional investors such as pension funds.

Some of the hedge funds who responded to the survey said that they are implementing structural changes to make their product offering more attractive to investors. By far the most common response was that funds are looking at how they can improve their transparency.