Survey: Hedge Fund Returns Disappoint Many Institutions In 2011

Oct 11 2011 | 10:52am ET

Forty percent of the roughly 50 institutional hedge fund investors polled recently by Preqin said their returns have fallen below their expectations in 2011.

That still leaves 60% who are generally happy with their returns (including 11% who say returns have so far exceeded expectations) but that proportion is the lowest it’s been in four years, according to the industry research firm. By way of comparison, Preqin notes that in 2010, 19% of institutional investors felt their returns had exceeded expectations.

Looking back at the past four years, expectations and reality came closest to meeting in 2009, when 73% of investors felt their returns had met or exceeded their targets.

Investors were also asked to name the areas of the hedge fund industry in which they’ve seen improvement over the past 12 months—44% of respondents said they’d seen improvement in fund level transparency, which is also the area in which the largest proportion of investors—50%—said they would like to see improvement.

On the issue of management fees, 43% of respondents said they’d like to see improvement while 27% said they felt things had improved in the past year. The gap was wider on the question of performance fees, however, where 48% of respondents wanted to see improvements and only 11% felt they already had. Lock-up periods, redemption frequencies and fees, and notice periods were also areas where investors wanted change.

Investors in 2011 aren’t so sure things are going their way anymore—35% said they felt terms and conditions had shifted in their favor over the past 12 months compared to 65% in 2010. Which isn’t to say they haven’t been trying to effect change themselves—46% said they’d attempted to negotiate lower fees in 2011, compared to 48% in 2010. A full 65% of respondents said they’d seen no change in fund terms and conditions this past year.

The good news for fund managers is that fewer investors are ready to reject funds based on fee structure in 2011 (47% said they had done so in the past 12 months compared to 65% in 2010).

As to what those fees look like, Preqin says 29% of single-manager hedge funds use the traditional 2/20 fee structure—breaking that down further, the data provider says 79% of managers charge a 20% performance fee while 40% charge a 2% management fee. The mean management fee is 1.6% while the mean performance fee is 19.2%. (Preqin’s numbers are based on a database of 2,000 single-manager hedge funds.)

Commenting on the results, Preqin’s manager of hedge fund data Amy Bensted said:

“Changes to the hedge fund industry are likely to continue apace as cautious institutional investors seek the best possible fund terms from their fund managers. Fees are of great importance to investors, and it is probable that managers will carry on moving away from the 2&20 structure. Dissatisfaction with hedge fund performance will be of concern to the industry and managers will have to listen to their clients to ensure that they keep them on side.

“If managers continue to respond to demands from institutional investors, positive inflows will remain in the industry, with the managers best able to adapt to the demands of investors reaping the largest rewards.”

Related: Prequin's Hedge Fund Spotlight, Oct. 2011


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