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Hedge funds forced to drop their fees in wake of meltdown

Date: Wednesday, November 10, 2010

INVESTORS are enjoying more negotiating power than ever before when it comes to investing in hedge funds, putting increasing pressure on managers to lower fees and offer greater liquidity in the wake of the credit crisis, a new survey has shown.

Over half of the investors polled for an Ernst & Young report on the industry said they now have more power than before the crisis, while over 40 per cent said they had actually managed to pressure their hedge fund managers to lower management and incentive fees.

One in three institutional investors now say they need more liquidity to invest than before Lehman Brothers collapsed in 2008, while three in ten say the maximum lock-up they will accept is now less than before.

But the survey showed hedge funds are already proactively addressing investor concerns, with almost 45 per cent of funds surveyed having made changes to fees, liquidity or structure in order to attract new capital.

The majority of both hedge fund managers and investors polled agreed that long-term investment performance is the key criterion for selecting a manager. But investors said clarity and consistency of investment philosophy are the next most important factors, contrasting with the view of managers, who picked reputation and recent performance.