Wed, Apr 16, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Ernst & Young survey finds managers implemented investor led changes and benefited from them

Monday, November 09, 2009
Opalesque Industry Updates: The global downturn forced hedge fund managers to respond swiftly and radically to the demands of investors, finds a new survey published today by Ernst & Young.

The survey, Weathering the storm, was conducted by international research-based consulting firm Greenwich Associates for Ernst & Young and polled 100 of the world’s largest hedge funds. It highlights the significant changes to the governance, fund administration and investor reporting in funds over the last year, all of which have enhanced investor confidence without significant additional cost to the fund.

Respondents believe that increases in transparency and governance brought on by the crisis represent dramatic improvements for investors. They see this rapid transformation as proof that the industry can effectively respond to the needs of investors. This is in stark contrast to managers’ opinions about increased regulatory oversight, which they view as imprecise, of less utility to investors and overly expensive.

Arthur Tully, co-leader of Ernst & Young’s Global Hedge Funds practice, says: “The managers we interviewed are not opposed to new regulation. To the contrary, they understand that there will be stricter regulatory oversight and they are preparing for it. They are concerned, however, about alignment between regulatory bodies in the United States, European Union (EU) and elsewhere and the cost of compliance relative to any positive benefit to investors.”

Profound structural changes
The financial crisis has forced dramatic changes to the hedge fund industry with the managers interviewed changing liquidity terms (40%), investor reporting (38%), fund administration or custody (32%), fee structures (27%), and risk management (27%) since the beginning of the year.

Over half of the funds (56%) surveyed had made or planned to make changes to redemptions terms and/or fees. One in four has lowered fees because of investor pressure with nearly half having done such to entice new capital. More controversially, almost a third of managers opted to impose gates or suspensions on redemptions during the crisis and nearly all remain optimistic that their actions will not have a negative impact on their ability to maintain or raise capital. Some 53% believed it would help maintain current investor capital in the fund over the long term.

Approximately 80% of managers responded that the primary area of focus for increased disclosure has been a better understanding of risk and performance. It is noteworthy that by a three to one margin investors are more focused on a better understanding of risk than performance. The most significant increases in risk management information shared related to risk concentration (95%) and leverage (71%). Nearly all respondents share this information on a monthly basis.

Ratan Engineer, global leader of Ernst & Young’s Asset Management practice, comments: “All of these increased disclosures are seen by the industry as worthwhile initiatives, in which the benefits clearly outweigh the costs. However, almost half of the respondents indicated that some information is shared only with those who ask.”

Proposed EU Directive to have dramatic impact
Outside Europe, and particularly in the US, there is limited awareness of the draft European Commission Directive on Alternative Investment Fund Managers (AIFM). Approximately a sixth of respondents who had considered the directive said they would cease operating in the EU altogether if it was passed in its current form, with 30% saying they won’t set up an office there.

Over four-fifths of European funds believed that the Directive would increase costs, while 28% believed it would improve investor confidence; 26% thought it would slow down reporting.

“Although there is a general belief that it is unlikely that the draft directive will be approved in its current form, there is concern as to its motivation, its directional thrust and a sense of disbelief that business legislation could be so politicized, appear so misguided and be promulgated with such a lack of consultation,” says Engineer.

Future trends
Despite endless talk about the re-domiciling of fund operations due to impending US tax legislation, the survey found that few funds are seriously considering doing so.

Managers predict that the hedge fund industry will see consolidation as a result of recent events and expected regulation. Increasing costs and greater barriers to entry will mean fewer and smaller start-ups than prior to the crisis.

Tully concludes: “The industry has weathered the storm, but has not been left unscathed. Although it appears resigned to accepting legislation, regulation and tax changes, there remains a real fear of the authorities overreaching and some of the actions being fundamentally misguided, resulting in costs far outweighing any benefits to investors.”

kb

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Banner
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing
  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Opalesque Exclusive: European stock-picking fund up 19% YTD, bets on small caps’ high cash level[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: Here is a European long/short equity fund that has been beating the odds since its 2008 inception by employing its own investment model, frequent company visits

  2. CTAs could face new challenges in a rising rates environment[more]

    Bailey McCann, Opalesque New York: CTAs have taken a beating performance wise lately, and asset flows reports show that investors aren't sticking around to see how the movie ends. Now, a new white paper from Roy Niederhoffer and Coen Weddepohl notes that as interest rates start to tick back u

  3. Investing – Big hedge funds bought Puerto Rico's junk bonds, Fidelity explores new trading venue amid flash trade concerns, Crisis-era Greek bonds reward early buyers with big effective returns, Cargill unit discloses stake in Freddie preferred[more]

    Big hedge funds bought Puerto Rico's junk bonds From Reuters.com: Several large hedge funds doubled down on Puerto Rico in last month's giant bond sale despite the U.S. territory's financial struggles, the Wall Street Journal reported, citing confidential documents reviewed by the newspa

  4. Opalesque TV: First Trust Advisors launches liquid alternatives platform[more]

    Bailey McCann, Opalesque New York: First Trust Advisors is launching a new liquid alternatives platform aimed at building on the companies existing alternative ETFs offering by adding hedged mutual funds. Senior Portfolio Managers Rob Guttschow and John Gambla recently sat down in an

  5. Commodities – Popular value fund manager David Iben bets on Russia, gold,[more]

    From Reuters.com: With large bets on Russia and North American gold miners, one of the best performing stock pickers in the wake of the 2008 financial crisis is back with a new fund that reflects his deep aversion to following the crowd. In the Kopernik Global All-Cap Fund, David Iben is follo