Hedge fund managers and investors are on the same page on a number of key industry issues but still beg to differ in some important areas, according to Ernst & Young's fifth annual survey of the global hedge fund market.
The report, Coming of Age, was compiled by the consulting firm Greenwich Associates which polled 92 hedge fund managers who manage some $600 billion and 42 institutional investors with over $130 billion allocated to hedge funds.
Areas in which the two have differences include governance, where 68% of managers say the board of directors is effective in carrying out its duties, but only 45% of investors agree, and three-quarters of managers say the board is accountable to investors, a view echoed by only 38% of investors.
"Investors still feel their boards are most interested in serving the interests of managers, rarely challenging them on issues that really matter to investors such as valuations, risk and style drift. There is a need for a closer consensus with boards acting neither as lap dogs nor dictators to the managers," says Ratan Engineer, global leader of Ernst & Young's asset management practice.
While hedge fund managers, faced with tighter margins due to higher costs for things like compliance, regulatory reporting, other infrastructure items, increased outsourcing and extensive shadowing, want to pass these costs along, but investors, not surprisingly, are less enthusiastic.
Take the question of shadow accounting: While the majority of investors agreed it was important, almost two-thirds objected to paying for it. Over 25% of managers, on the other hand, said they currently pass on these costs.
Two-thirds of investors consider a well-articulated succession plan important to their investment decisions, a view shared by only 38% of managers. Moreover, while 50% of investors expressed confidence in their hedge fund managers’ succession strategy, only 39% of managers actually had one.
The report also shows that while 55% of hedge fund investors profess loyalty to individual portfolio managers, over half of hedge fund managers believe investors are loyal to a firm’s founding principals.
And speaking of those founding principals, 83% of investors want them to have skin in the game, a belief shared by only 60% of managers.
While long-term investment performance remains a priority, nearly two-thirds of investors list the portfolio management team as the most important criterion they consider when selecting a manager. On the flip side, only half of managers agree, with 72% of them naming long-term performance as one of the most important criteria.
When it comes to losing investors, 40% of managers said they did not know why they’d lost a mandate while investors listed reasons including concerns about risk management policies, inconsistency of information presented and lack of an independent board or administration.
"Many managers feel they are not getting a straight answer when an investor passes on a mandate, leaving them guessing at the reasons why. There is a significant opportunity to improve communications between managers and investors so managers can better provide investors with what they need to make good decisions,” said Arthur Tully, co-leader of Ernst & Young's global hedge funds practice.
Where the two sides do agree, according to the report, is on the impact of regulation, which was listed as the chief worry of 48% of hedge fund managers and 36% of investors.