NYHFR Survey: Modest Returns Likely To Become Commonplace

Dec 18 2015 | 8:27pm ET

A new survey by the New York Hedge Fund Roundtable reveals concerns among institutional alternative asset managers that modest returns will become more commonplace as managers are confronted with increasing amounts of capital, stricter regulation and less risk-tolerant investors.

The survey canvassed the Rountable’s membership for their opinions on the changing investor landscape and how it is impacting hedge funds’ practices, or is likely to do so in the future. Members believe that as more and more money continues to flow into the hedge fund industry, fund managers will not only have an increasingly difficult time putting that money to work, but more modest returns will become commonplace. 

“The credit crisis had a significant impact on the ways institutions approach alternative investments,” said Timothy Selby, president of the NYHFR, in a statement. “Alternative investment fund managers will need to be vigilant in studying the interests of the investor community and make adjustments to keep them interested and engaged. This may include periodically assessing fee and liquidity concerns.”

Other key findings of the survey:

  • Only 34% of respondents indicated that their firms have either lowered fees or are considering lowering them.
  • While 20.5% of respondents said they are offering a lower fee structure for investors willing to accept longer lockups, 79.5% of respondents said they have not changed any of their investment terms because of liquidity concerns and believe that institutional investors are starting to realize that forcing managers to maintain more liquid positions will mean lower returns.
  • When asked whether the low risk tolerance of pension plans has been a factor in hedge fund returns this year, 44% of respondents said that the industry’s returns are primarily a reflection of a lingering low interest rate environment and overall market conditions; 32% said that, despite the importance of institutional investors, fund managers will not forego attractive investments and will risk losing investors that don’t back them; and 13% believe that the industry’s poor returns reflect attempts to lower the overall risks within portfolios have forced them to unload or steer away from investments that would have otherwise boosted their returns.
  • Asked about their predictions for the long-term returns within the hedge fund industry moving forward, 32% of respondents said that the rising number of hedge funds and ongoing inflows of institutional money into the industry are making it harder for fund managers to identify enough unique and attractive investment opportunities for the money they raise, with more modest returns likely to become commonplace.
  • 21% thought that as the hedge fund industry faces greater pressure to reduce risk and stricter regulatory oversight, the gap between the returns generated by mutual funds and hedge funds will continue to diminish.
  • 15% think that as U.S. and foreign stocks increasingly move in tandem, and as a growing number of mutual funds adopt alternative investment strategies, hedge funds will find it harder to deliver returns significantly above market indexes.
  • When asked whether they expect returns and risk (standard deviation of returns) to be higher or lower than they have been over the past 10 to 15 years, 59.5% of respondents said that just as market conditions are virtually impossible to predict, so too is the direction standard returns will move; 23.5% of respondents expect that as more entrants continue pouring into the hedge fund industry, greater competition for investment opportunities will spur fund managers to assume more risk and will cause standard deviations to rise; and 17% think that the increased pressure to lower risk that has existed since the credit crisis will keep standard deviations trending lower.
  • Asked where they are looking to add staff, 27.5% of respondents said sales, 27.5% said operations, 21% said research, 10.5% said investor relations, and 13.5% are not looking to add staff at the moment.

Each NYHFR survey contains a bonus question, which this year dealt with the 50th anniversary of “A Charlie Brown Christmas,” which would put Charles M. Schulz’s famous characters in their late 50s if they had grown up. Roundtable members were asked what they think the characters would be like/be doing today if they had aged.  

  • 41% of respondents said Schroeder would, of course, have gone on to become a famous composer.
  • 25% think that years of being excluded from parties and events would have driven Charlie Brown to prove his worth and that he’d have gone on to become a successful investor rivaling even Warren Buffett, which would have changed the little red haired girl’s tune and motivated her to marry him.
  • 18% believe that Lucy’s focus on popularity and the continuation of her mean girl ways throughout high school will have caused her to fail out of college, leaving her working as a waitress and struggling to make ends meet.
  • 16% think that years of being picked on, heckled and left out of everything will have completely messed with Charlie Brown’s head, causing him to snap and become a serial killer.

Of the respondents, 34% were fund managers, 22% were allocators, 5% were involved in risk management or trading, 38% were service providers, and 1% were other industry participants. 

The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers.

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