Hedge funds adjust to client power

By Sophia Grene

Published: January 24 2010 09:11 | Last updated: January 24 2010 09:11

Hedge funds are changing their behaviour as institutional investors demand greater transparency and better terms.

“Power has definitely shifted to the investors,” said David Morrissey, head of business development for Europe at SEI Investment Manager Services. “An awful lot of hedge fund managers are paying a lot more attention to what their clients want.”

Institutional investors remain unswerving in their commitment to hedge funds, but expect consideration in return, according to SEI’s third annual survey of institutional hedge fund investors.

Poor performance was last year’s worry, while this year investors are focusing on transparency and liquidity, the survey found. According to a paper based on the survey*, investors are forcing hedge fund managers to up their game when it comes to valuations, operational efficiency and identifying their sources of alpha.

“A couple of years ago, simply delivering a monthly NAV [net asset value] was considered acceptable,” said Mr Morrissey. “Now a lot more value-adding information is required.”

Fees and investment terms are also being squeezed. Traditionally investors paid a 2 per cent annual management charge and 20 per cent of performance for single funds, or 1 and 10 for funds of hedge funds, and accepted whatever redemption terms the hedge fund manager dictated. Now almost one in five investors said they had renegotiated fees or terms with hedge fund managers.

Although fees are generally standing up to the pressure, said Mr Morrissey, the lock-ins and gates that made it harder for investors to get their money back when they wanted are no longer so prevalent.

“Whether [the hedge fund managers] will change back again when the good times come back, who can say?”

*The Era of the Investor: new rules of institutional hedge fund investing