Despite some rough treatment in May, the global hedge fund industry has bounced back from the beating it took in 2008, according to a recent article in Hedgeweek. Global assets invested topped the $2 trillion mark and continue to flow back.
However, the turmoil of the past two years has etched some lasting changes in the hedge fund landscape. Jessel Mendes and Chad Critchley, partners in the Financial Services Office of Ernst & Young, Bermuda, point out that investors are more cautious now and are demanding increased levels of protection, performance, transparency and quality.
For investors, a bigger demand for transparency means funds must share more information about leverage, risk management and the geographical distribution of their investments. Some funds are using multiple third-party custodians to hold assets. The financial information they share is now often subject to independent review and verification.
For fund managers, the big challenge now is to re-establish the trust and loyalty they once enjoyed among investors, in order to attract and retain capital. This means fund managers must spend more time with investors, making sure their demands are met. It also means hiring more senior staff such as chief compliance officers, chief technology officers and risk management specialists to reassure investors and keep up with an increasing demand for reporting and regulatory oversight.
This necessary increase in infrastructure spending will put a squeeze on smaller firms that won’t have the resources to keep up. It’s likely we will see a consolidation in the industry as large firms merge or gobble up smaller firms.
How has the new environment affected your firm? Add your comments below.