Investor dissatisfaction with hedge funds increases, according to Preqin

Date: Wednesday, October 12, 2011
Author: Martin Leonard, COO Connect

More investors are expressing dissatisfaction with hedge funds performances with 40% saying returns were below expectations, according to research by Preqin.

This compares with 28% in 2010. “Investor dissatisfaction in regards to hedge fund returns was greater in 2008 than in the following two years. It appears that 2011 has proved to be another disappointing year for the institutional investor,” said the report. Many hedge funds have been caught off-guard by the recent market volatility with several high profile names suffering serious losses.

Despite this, only 35% of respondents said investment terms had shifted in their favour compared with 61% in 2010. “The past 12 months have seen a decline in the pace of investor-friendly developments in fund terms that had been made throughout 2009 and 2010,” said the report. However, it is important to note that not one investor said fund terms had changed in favour of the manager.

Predictably, management fees have continued to drop to an average of 1.6% from the traditional 2% although 43% of investors wanted further reductions. Only 11% of investors reckoned there had been a significant movement in performance fee structures over the last year with over half of all institutions demanding more concessions. The average performance fee stands at 19.2% as opposed to the historical 20% norm. Asia and ROW (rest of the world) hedge fund managers charge the lowest fees, according to Preqin’s data.

“Redemption fees could also see changes over the next 12 months. Only 5% of respondents felt that advances had been made in this area over the last year but 37% of investors want to see more favourable terms going forward. Several investors have been caught unaware by the redemption policies within their portfolios,” said the report.

However, the proportion of investors attempting to negotiate lower fees has fallen slightly to 46% in 2011 from 48% in 2010. Of those who entered into negotiations with managers, 71% were able to secure lower fees. Furthermore, fewer investors will reject a fund due to fees. Some 47% acknowledged they had turned down a fund because of fees this year compared with 65% in 2010.

“Pressure from maturing investors has also drawn managers away from the typical 2 and 20 structure. Following weak performance in the industry, investors have been increasingly vocal about the disparity between the high fees associated with investing in hedge funds and actual returns gained citing a lack of value for money. Predictably, only large investors like the US-based public pension fund CalPERS had enough influence to gain favourable terms but now smaller investors with experience in the industry are demanding lower fees as well,” it said.

Amy Bensted, manager of hedge fund data at Preqin, anticipated managers would continue to move away from the traditional 2 and 20 model. “Dissatisfaction with hedge fund performance will be of concern to the industry and managers will have to listen to their clients to ensure that they keep them on side,” she added.