Hedge fund transformation could benefit investors: Ernst & Young

Date: Wednesday, November 11, 2009
Author: Investment Executive

The largest hedge funds in the world say investors could actually benefit from some of the fast and furious changes the global financial crisis spurred, Ernst & Young finds in a new survey.

Respondents from 100 of the world’s largest hedge funds cited recent increases in transparency and governance as dramatic improvements for hedge fund investors.

“As a part of the North American hedge fund industry, the trends in Canada generally mirror the findings we’re seeing on a more global scale,” says Leon Chin, partner, Ernst & Young. “Our global survey respondents see this rapid transformation as proof the industry can effectively respond to investors’ needs. That’s a good sign for the future.”

However, the survey does highlight some areas of concern, such as managers’ opinions about increased regulatory oversight and further consolidation of the industry.

“The managers we interviewed understand there will be stricter regulatory oversight, and they’re preparing for it. The concern is really about the uncertainty around the form and depth of regulation and the associated costs,” explains Chin. “We’ll have to see how things evolve in time.”

Overall, the survey found the crisis has forced a number of dramatic changes on the industry since the beginning of 2009. Among them:

• One in four managers lowered fees because of investor pressure, with nearly 50% having done so to entice new capital.

• Almost 30% imposed gates or suspensions on redemptions during the crisis, but they remain optimistic their actions will not have a negative impact on their ability to maintain or raise capital.

• Forty per cent of managers interviewed changed liquidity terms.

• Thirty-eight per cent made changes to investor reporting.

• Twenty-seven per cent adapted their risk management approach.

“Much has changed in the last 18 months for hedge funds in Canada, and around the world,” says Chin. “The industry has weathered the storm, but has not been left unscathed. Funds must continue to build on the positive changes they’ve made, and incorporate these lessons from change into their future plans.”