December, 2015 –The 2008 credit crisis may not have slowed the influx of capital into the hedge fund industry, but it did change the way institutional investors look at the individual funds they invest in. Just as regulators have heightened their oversight of the hedge fund industry, institutions have stepped up the due diligence they perform on individual hedge funds and have lowered their tolerance for risk and illiquid investments. The New York Hedge Fund Roundtable recently surveyed its membership about the changing investor landscape and how it is impacting hedge funds’ practices, or is likely to do so in the future.
Members of the Roundtable believe that as more and more money continues to flow into the hedge fund industry fund managers will not only have an increasingly difficult time putting that money to work, but more modest returns will become commonplace throughout the industry. “The credit crisis had a significant impact on the ways institutions approach alternative investments,” said Timothy P. Selby, President of the New York Hedge Fund Roundtable. “Alternative investment fund managers will need to be vigilant in studying the interests of the investor community and make adjustments to keep them interested and engaged. This may include periodically assessing fee and liquidity concerns.”
An investment consultant’s view of the hedge fund industry was the topic of the Roundtable’s December event, where Ryan O’Quinn, a principal with investment consulting firm Prime Buchholz, shared his thoughts on some of the shifts that have occurred in the way investors approach hedge fund investments. Members of The New York Hedge Fund Roundtable had the opportunity to weigh in on the changing investor landscape at the December event, as well as through an online electronic poll.
*Of the respondents to this survey, 34% were fund managers; 22% were allocators; 5% were risk management or trading; 38% were service providers and 1% were other industry participants.
Following are some of the key findings of that survey:
- Only 34% of respondents indicated that their firms have either lowered fees or are considering lowering them.
- While 20.5% of respondents said they are offering a lower fee structure for investors willing to accept longer lockups, 79.5% of respondents said they have not changed any of their investment terms because of liquidity concerns and believe that institutional investors are starting to realize that forcing managers to maintain more liquid positions will mean lower returns.
- When asked whether the low risk tolerance of pension plans has been a factor in the less than stellar returns hedge funds have been generating as of late, 44% of respondents said that the industry’s returns are primarily a reflection of a lingering low interest rate environment and overall market conditions; 32% said that, despite the importance of institutional investors, fund managers will not forego attractive investments they feel strongly about and will risk losing investors that don’t back them; and 13% of respondents believe that the industry’s poor returns reflect the fact that hedge funds’ attempts to lower the overall risks within their portfolios have forced them to unload or steer away from investments that would have otherwise boosted their returns.
- Asked about their predictions for the long-term returns within the hedge fund industry moving forward, 32% of respondents said that the rising number of hedge funds and ongoing inflows of institutional money into the industry are making it harder for fund managers to identify enough unique and attractive investment opportunities for the money they raise, with more modest returns likely to become commonplace; another 32% said that as market conditions continue to ebb and flow, so too will hedge fund returns; 21% of respondents think that as the hedge fund industry faces greater pressure to reduce risk and stricter regulatory oversight, the gap between the returns generated by mutual funds and hedge funds will continue to diminish; and 15% think that as U.S. and foreign stocks increasingly move in tandem, and as a growing number of mutual funds adopt alternative investment strategies, hedge funds will find it harder to deliver returns significantly above market indexes.
- When asked whether they expect returns and risk (standard deviation of returns) to be higher or lower than they have been over the past 10 to 15 years, 59.5% of respondents said that just as market conditions are virtually impossible to predict, so too is the direction standard returns will move; 23.5% of respondents expect that as more entrants continue pouring into the hedge fund industry, greater competition for investment opportunities will spur fund managers to assume more risk and will cause standard deviations to rise; and 17% think that the increased pressure to lower risk that has existed since the credit crisis will keep standard deviations trending lower.
- Asked which areas of their business they are currently looking to staff, 27.5% of respondents said sales; another 27.5% said operations; 21% said research; 10.5% said investor relations; and 13.5% are not looking for additional staff at the moment.
December’s “bonus” question: This year marks the 50th Anniversary of “A Charlie Brown Christmas,” which would put Charles M. Schulz’s famous characters in their late 50s if they had grown up. Roundtable members were asked what they think the characters would be like/be doing today if they had aged. 41% of respondents said Schroeder would, of course, have gone on to become a famous composer; 25% think that years of being excluded from parties and events would have driven Charlie Brown to prove his worth and that he’d have gone on to become a successful investor rivaling even Warren Buffett –success that will have changed the little red haired girl’s tune and motivated her to marry him; 18% believe that Lucy’s focus on popularity and the continuation of her mean girl ways throughout high school will have caused her to fail out of college, leaving her working as a waitress and struggling to make ends meet; and 16% think that years of being picked on, heckled and left out of everything will have completely messed with Charlie Brown’s head, causing him to snap and become a serial killer –with Lucy becoming his first victim.
About The New York Hedge Fund Roundtable:
The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers. Monthly events center around thought-provoking speakers and panels designed to keep members apprised of timely and important issues within the alternative investment industry. The Roundtable’s goal is to provide a forum for thought leadership, where industry professional have the opportunity to enhance their knowledge and skills and to network with other individuals committed to advancing the industry with the highest ethical standards. For additional information about the Roundtable, visit: http://www.nyhfr.org