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Hedge funds face higher costs: Ernst & Young

Date: Friday, December 7, 2012
Author: advisor.ca

Nearly 60% of hedge fund managers in North America say the cost of business has increased in the past year. However, there continues to be a disparity between managers’ and investors’ views about what costs should be borne by the fund, according to a recent Ernst & Young survey.

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“Our survey found that 68% of funds passed along these increased costs — up from only 34% in 2011,” says Joseph Micallef, financial services partner and Canadian asset management industry tax leader at Ernst & Young. “There will continue to be a greater push and pull on this issue of cost allocation for the foreseeable future as investors increasingly show less appetite for costs to be charged to the fund than they did a year ago. We don’t see this trend changing unless funds greatly improve investment performance returns.”

Read: Dispelling myths about hedge funds

Ernst & Young’s Global Hedge Fund and Investor Survey 2012: Finding Common Ground also finds that while investors certainly consider a fund’s performance when deciding whether to invest or discountinue their investment with a particular fund, it’s not — contrary to what most fund managers believe — their top consideration.

“Long-term performance is only the fourth most important criterion for investors, after the investment team, investment philosophy and risk management policies,” says Micallef. “Compared to 2011, both long-term and short-term past performance declined in importance for the investor community.”

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“With the cost of doing business increasing, and investors not ready to foot the bill, conditions are ripe for a perfect storm. There are more barriers to entry for start-ups, and we’re seeing consolidation among those that don’t yet have capital to support investment in new infrastructure,” adds Micallef. “But, while the storm is likely to persist in the short term, there are still investments to be found. Managers who are creative about where they seek these untapped investment capital dollars will thrive.”