5th Annual Global Hedge Fund Symposium in Luxembourg
On 5 April, Ernst & Young Luxembourg held its 5th Annual Global Hedge Fund Symposium – one in a series of 20 symposia held globally. The event, chaired by Michael Ferguson, Ernst & Young Luxembourg’s Asset Management Leader, discussed and debated the challenges and the key trends impacting the global hedge fund industry.
Past and present
2009 & 2010 saw renewed confidence in the industry with assets under management beginning to approach their all time high once again. However, the financial crisis has resulted in “the big getting bigger”, with 90% of the industry's asset flows being invested with the largest managers. The hedge fund investor base is continuing to evolve with the number of individuals investing in the asset class halving since 1999, being replaced by institutional investors.
2011 has seen an increased level of new hedge fund start-ups, particularly by second generation asset managers, many being former employees of investment banks. Managers are extremely concerned about the unintended consequences of several regulatory proposals including the much discussed AIFM Directive.
A panel discussion followed, debating how regulation is likely to shape and mould future hedge fund operating models. Participants agreed that while there was definitely a role for regulation in the hedge fund industry, proportionality would be key. The current wave of regulation is extremely complex and will no doubt give rise to unforeseen challenges. The hedge fund operating model is not expected to change significantly in the foreseeable future: investment advisors are expected to remain in the main asset management centers of London and New York; there is an expectation that certain hedge funds will establish AIFM Directive approved managers in Europe to satisfy institutional investor demand, however this will be an evolutionary process rather than a big bang approach. European fund domiciles will grow their share of the hedge fund market, but Cayman will continue to play a very significant role as a domicile. Fund administration will continue to be dominated by Ireland and Luxembourg.
The results of Ernst & Young’s 4th Global Hedge Fund Survey showed perhaps somewhat surprisingly that the majority of both managers and investors believe that regulation will not actually benefit the industry. The survey also highlighted how managers and investors had reacted as a result of the crisis. Investors appear to have much more negotiating power since 2008 with managers being obliged to improve liquidity terms and reduce fees in an attempt to retain/attract capital. Fee reductions have had a negative impact on the fund’s ability to retain/attract talent but changing liquidity terms have not had a significant impact on investment strategies. Manager compensation models are expected to become more of an issue in the future as managers align with investors’ interests in other areas.
Recent press focus would suggest that Switzerland is a rising domicile for hedge fund managers. With a favorable tax regime and a high quality of life Switzerland appears very attractive. However, uncertainty around the Swiss reaction to the AIFM Directive, a limited pool of expertise, governmental wish to avoid concentration in one industry, and other jurisdictions competing by reducing tax rates all lead to the conclusion that while Switzerland will continue to be home to parts of the operations of several large hedge fund managers, a mass conversion of hedge fund managers from other locations, particularly London, is unlikely.
It is evident that the future challenge for the hedge fund industry will be finding the balance between investor demands and regulation, while still being nimble enough to navigate the market.