Opalesque Industry Update - Fewer than One-Third of Managers Polled Anticipate a Difficult Year for the Sector|
Rothstein Kass, a leading professional services firm to the alternative investment community, has published its fifth annual report on hedge fund industry trends. “2011 Hedge Fund Outlook: Brighter Days Ahead?” features the findings of an internet survey of 313 hedge fund managers on their views regarding subjects from capital raising intent to the intensifying regulatory agenda, including the impact of the Volcker Rule on proprietary trading operations at large financial institutions.
The survey was conducted in January 2011, with roughly 70 percent of participants reporting assets under management (AUM) under $500 million, and the balance reporting AUM in excess of $500 million. Key findings include:
• Roughly one-third of hedge fund managers believe 2011 will be a difficult year for the hedge fund industry, a marked improvement from one year ago, when almost 70 percent predicted a rough year ahead
• Nearly 75 percent of survey participants expect that there will be more hedge fund launches in 2011 than in the prior year
• More than 60 percent of managers expect that there will be fewer hedge fund closures in 2011 than in 2010
• 62 percent of survey respondents also agree that as hedge funds add staff, they will benefit from an inflow of talent from other segments of the financial services industry
• Funds launching in 2011 will be more dependent on seed capital than in 2010, according to more than 62 percent of managers polled
“Even at the height of the crisis, our research found that the hedge fund community remained confident in its long-term positioning. Still, in the face of market uncertainty and regulatory challenges, most managers acknowledged the many obstacles ahead. Over the past two years, the sector has again shown its resilience by adapting to meet the evolving needs of its investors. More than 70 percent of hedge fund managers anticipate that institutional investors will be the dominant source of new capital in 2011. While this may not seem surprising today, it is in stark contrast to our 2007 survey results. At that time, only 20 percent of respondents reported that institutional money would come to dominate the industry,” said Howard Altman, Co-CEO of Rothstein Kass and Principal-in-Charge of the firm’s Financial Services Group.
“Those firms that took the lead in developing and implementing institutional-quality operational practices – from succession planning to reporting – are now benefiting from increasing allocations from pension and defined benefits plans seeking to overcome their own funding shortfalls deepened by the crisis.”
“2011 Hedge Fund Outlook: A Brighter Day?” finds the overall trend toward the institutionalization of the hedge fund industry intensifying:
• More than 85 percent of hedge fund managers expect institutional investors to be more averse to high concentrations of illiquid portfolio assets
• General partner investment will be a greater consideration for investors evaluating hedge fund allocations, according to three-quarters of respondents
• Over 80 percent of survey participants expect institutional investors to continue to exhibit a preference for allocations to larger hedge funds
• Nearly 65 percent of managers polled expect that hedge funds will more frequently offer special terms to pension funds and sovereign wealth funds
“The institutionalization of the hedge fund industry is likely to accelerate in coming years. Though regulatory initiatives have played a role, the push for greater communication and transparency is still predominantly a market-driven phenomenon. The fiduciary responsibilities of institutional advisors continue to inspire enhancements to due diligence processes, as investors now more commonly look beyond performance at a range of considerations, including succession planning and operational and reporting practices,” said Mr. Altman.
“Enhancements in these areas have helped to restore investor confidence, and the regulatory focus is likely to persist. When we commissioned our first industry survey in 2007, less than 10 percent of respondents expected significantly more industry regulation. As an ever-increasing portion of “Main Street” has gained access to alternative products through their pension plans, regulatory scrutiny has logically intensified. While these efforts have helped to dispel the notion that the hedge fund industry is unregulated, hedge fund managers have also relied on an enhanced communications focus to dispel other, long-standing misconceptions regarding the sector and its practices.”
The Rothstein Kass “2011 Hedge Fund Outlook” features an insert that highlights notable contrasts across five years of survey data. Among notable findings:
• In 2007, only 20 percent of managers expected institutional money to dominate the hedge fund sector. More than 70 percent of managers believe this to be true today
• More than three-quarters of managers expect to increase AUM in 2011, with nearly 60 percent indicating that they will raise assets by 25 percent or more. In 2010, 67 percent of managers were expecting to raise significant new capital, with only 32 percent expecting to increase assets by 25 percent or more. In 2009, nearly all survey participants expressed a desire to source significant new investment capital