Hedge fund community worried about regulatory reform, survey reveals

Date: Monday, June 29, 2009
Author: Hedgeweek.com

Portfolio managers and executives of US hedge funds believe the industry can survive the economic turmoil, but the overriding concern - by a three-to-one margin - is that the government will go too far in its financial regulatory reform plan and stifle the market.

The opinions are part of a report published by RSM McGladrey which surveyed the hedge fund industry to determine how they are dealing with the effects of the recession.

"Respondents are concerned that excessive regulation may result from President Obama's 17 June announcement of planned regulatory reform that would include a requirement that hedge fund advisors register with the SEC and adhere to new requirements for record keeping, disclosure and reporting," says Jeffrey Yager, co-leader of RSM McGladrey's financial services practice.

The survey also indicated openness to more regulation, as hedge fund managers appear ready to work with President Obama's team to craft reasonable regulation moving forward.

When asked if they believed the SEC's regulatory oversight authority was sufficient, 42 per cent of respondents noted that the agency needs additional authority, while 50 per cent believe the SEC's oversight is sufficient but the SEC needs additional funding to be more effective.

The RSM McGladrey survey found that 60 per cent of more than 100 respondents believe the current economic environment presents more investment opportunities than challenges. Hedge fund managers are optimistic that the market will improve late in 2009 or early 2010, providing them and their investors with new opportunities.

Among respondents, 69 per cent expressed optimism that the US economy will return to positive growth by the second quarter of 2010. A majority (56 per cent versus 41 per cent) believe that the private sector, not the public sector, will be responsible for cleaning up most of the problems in today's financial system.

Respondents pointed to declining profits, fewer worthwhile investments, redemptions and lack of access to new asset inflows, in that order, as indicators of the impact of the economic crisis on their firms. With regard to redemptions, 65 per cent of respondents expressed either major or minor concern about them. When it comes to risk taking, 56 per cent of respondents said their risk appetite has declined, from a lot to a little.

On the other hand, 88 per cent of respondents to the RSM McGladrey survey remain bullish about their ability to retain their top talent, while 87 per cent note their firms are not planning to adjust their equity plans or rework their hurdle risks and 91 per cent do not have liquidity concerns about their fund. A further 83 per cent are not planning to seek lockup periods for new investors.

While not ignoring the wide range of evident threats to their businesses and the hedge fund industry as a whole, hedge fund managers as a group, by almost two-to-one, expressed optimism that the current economic environment offers more investment opportunities than challenges.

Yager adds: "Like President Obama, the hedge fund community remains optimistic about the future of the American economy and the opportunities it will present for investors and the financial services firms who allow them access to the marketplace. The hedge fund industry is likely to contribute to making the economy emerge stronger in the long run. The key is for financial professionals and government regulators to work together toward a shared goal of increased transparency and economic growth and opportunity."