Managed account assets to rise 70 per cent by 2011

Date: Friday, November 6, 2009
Author: Hedgeweek.com

Assets in the hedge fund industry invested through managed accounts will reach USD790bn by 2011, up from USD468bn in 2009, according to research by Tabb Group.

The survey of 62 US hedge funds also found that 77 per cent cited operations, safety of strategy and liquidity risk as their three top concerns.

Matt Simon, Tabb research analyst and author of the study, “US Hedge Funds 2009: Fees, Redemptions and Managed Accounts,” says investors are now asking more questions on topics previously seen as a minor part of the due diligence process, from safety and soundness of assets, to greater insight into the investment process, including actual holdings.

The focus on transparency, liquidity and flexibility are the primary drivers of the managed accounts phenomenon. However, hedge fund managers said their investors are still attempting to understand the differences between having a managed account versus being in a hedge fund.

The primary drawback for investors via a managed account, says Simon, revolves around day-to-day activity: “There are cost and administrative benefits to keeping up with portfolio transactions.”

Within the hedge fund structure itself, hedge funds are striving to protect their business. Focusing specifically on fees, Tabb Group expects management and performance fees to decline over the next two years, even though they do appear somewhat stagnant today.

Simon says: “Many wouldn’t be surprised to know that “2 and 20” is still alive and well. When weighted by assets under management, the reality is ‘1.75 per cent and 21.93 per cent’.”

Many small and medium funds are driving the trend downward, as the competition to appeal to investors is intense. With a limited supply of capital at hand, hedge fund managers are in a weak if not a precarious position to defend against fee reductions. While only 15 per cent believe performance fees will decline over the next two years, nearly 25 per cent say management fees will decrease. Moreover, hedge funds that performed well during the past year are eager to lower their performance fees, further solidifying their marketing pitch.

Hedge funds tell Tabb that they are attempting to convey confidence by implementing more liberal lock-up periods. Compared to a few years ago, the typical lock-up period has shortened. In 2006, it was approximately 13 months; today it is closer to ten.

On the issue of hedge fund redemptions, the typical period of advance notice that an investor must provide a fund manager is 30 days. Other hedge funds requiring lengthier notifications told Tabb that they are re-evaluating these terms, but as Simon points out, they expect no changes occurring in the near future: “They believe that the notification period is aligned with cash management best practices.“