Hedge Fund Trends Reflect Uncertainty

The market meltdown and recent scandals involving Bernie Madoff and the Galleon Group insider-trading case may lead to more intense scrutiny and long-term systemic changes for the hedge fund industry, according to Reuters.

Among the changes on the horizon for the industry will be mandatory registration with the SEC, and perhaps closer governmental oversight of the largest funds, the type of which could set off a crisis if they failed.

Institutional investors will be much more cautious about where they invest their money, looking for security as much as performance. They will also demand more transparency, flexibility and actual performance for the fees they pay. Multi-year lock-ups on cash and “gates” on withdrawals could be a thing of the past. Some investors are demanding seperately managed accounts, which insulates them in the event of heavy redemptions in a hedge fund. This would, presumably, lead to higher management costs.

There will also be downward pressure on the fees charged by hedge funds. The “2 and 20” industry standard is already coming under fire from large investors such as the California Public Employees’ Retirement System (Calpers) who have pressured their fund managers to revise their fees.  During the boom times, even funds that did not produce stellar returns still benefitted from the 2 and 20 structure. However, in the aftermath of the past 18 months, some hedge fund fees may already be drifting toward 1.5 percent management fees and 15-18 percent of profits, and other alternative fee structures.

This will put downward pressure on hedge fund compensation. A report published by Job Search Digest, publishers of Hedge Fund Jobs Digest, revealed a disconnect between fund performance and hedge fund compensation. The third annual industry survey of hundreds of hedge fund managers and employees, in mostly privately held firms, showed that bonuses continue to rise despite 45 percent of respondents reporting fund losses. Investors are taking note, and the days of fat fees for dubious performance are dwindling.

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