Perceived benefits of hedge fund regulation deteriorates among investors
Monday 3 December 2012 — Despite increasing regulatory requirements for hedge funds, only 10% of investors feel that the regulations effectively protect their interests and 85% do not believe these requirements will help prevent the next financial crisis, according to EY’s sixth annual survey of the global hedge fund market.
The 2012 survey, Finding Common Ground, compiled by consulting firm Greenwich Associates for EY, compares opinions from 100 hedge fund managers who manage over US$710 billion and 50 institutional investors with over US$190 billion allocated to hedge funds.
EY Oceania Asset Management leader, Antoinette Elias said regulatory change was particularly relevant in the Australian market, given the anticipation around the yet to be released Investment Management Regime (IMR) Element 3.
“IMR Element 3 will introduce an exemption from Australian tax regarding certain Australian sourced gains for those funds that meet the definition of an IMR Fund,” Ms Elias said.
“IMR Element 3 will have retrospective application from 1 July 2011 and it is expected that the definition of an IMR Fund will contain both a widely held test and a concentration test – similar to IMR Element 1 and IMR Element 2.
“However, the industry will also be seeking to have some of the limitations in the current definition corrected or clarified,” she said.
In addition to views on the regulatory environment, the survey findings also show that although fund managers and investors are in agreement on increasing investments in headcount, technology and risk management, there are some stark contrasts in other areas.
Speaking at EY’s annual Hedge Fund Symposium in Sydney, EY Oceania Hedge Fund leader, Jon Pye said operational risk was one area where there was a clear distinction between the attitudes of the two groups.
“More than half of investors (56%) cited operational risk as a common driver of redemption, compared to just 10% of fund managers,” Mr Pye said.
The ability of the manager to effectively manage the risks associated with generating performance is a key driver of investors’ decisions to both initially invest in and then stay with the fund.
“Managers overwhelmingly cite performance as the primary reason for redemptions (86%) and while investors also see this as important (86%), they are almost equally inclined to take their assets elsewhere when there are key changes in personnel (84%).
“Turnover is a significant communications challenge for funds. Managers that are able to communicate openly and honestly with investors about changes in their team may give investors the confidence they need about future returns to keep them from pulling out,” he said.
Looking forward at the next twelve months, Mr Pye said increased regulations, a saturation of funds and strategies, and continuing turbulence in financial markets would continue to place pressure on the hedge fund industry.
“Access to capital will also continue to be a key priority for the local hedge fund industry throughout 2013, with investors demanding greater transparency and improved risk-adjusted returns before making the decision to commit funds.
“Notwithstanding some lackluster performance, two-thirds of pension funds and endowments surveyed said they planned to maintain their current investment level with hedge funds.
“Given the modest proportion of current investors who expect to increase their hedge fund allocations over the next few years, opportunities for growth will be difficult to obtain.
“Investors have pointed to performance and high fees as the key impediments to increasing their investment allocations. The allure of hedge funds has waned somewhat given that returns across the industry have become far more correlated with, and in some case even underperforming, the wider market,” Mr Pye said.
“In this environment, fund managers will need to reinvent themselves, adapt to the changing landscape and drive innovation within the industry more than ever before in order to attract and retain investors.”
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About the survey
Greenwich Associates, a global research and consulting firm, interviewed 100 hedge funds representing over US$710 billion in assets under management, and the views of 50 institutional investors representing over US$715 billion in assets under management. The objective of the study was to record the views and opinions of hedge funds and hedge fund investors globally, measure the views of each on the same topics and examine the two groups together. Hedge funds and hedge fund investors were asked to comment on investor demand and hedge fund selction; headcount, infrastructure and costs,; administration; Euro-zone considerations; regulations and reporting; compensation structure; and the future landscape. For the full survey report, please visit www.ey.com/hedgefundsurvey.
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