Hedge funds expect greater scrutiny

If there is a silver lining to the cloud that was the great financial crisis of 2008, it could be the light it shone into the shadowy corners of the financial services industry. Few crannies were murkier than the world of hedge funds, but the industry has since undergone something of a transformation.

The financial crisis forced a drive for increased transparency and improved governance, which could benefit investors, according to hedge fund executives and managers surveyed by Ernst & Young.

“Much has changed in the last 18 months for hedge funds in Canada, and around the world,” says Leon Chin, a partner with Ernst & Young. “The industry has weathered the storm, but has not been left unscathed. Funds must continue to build on the positive changes they’ve made and incorporate these lessons from change into their future plans.”

Roughly a quarter of hedge fund managers have lowered their fees in response to investor pressure. Half of those that cut fees said they did so to attract new capital.

Many managers have also changed the liquidity terms (40%). While almost 30% have imposed “gates” or suspensions on redemptions to stem outflows, they were optimistic that these measures would not limit their ability to attract capital.

Risk management models have been modified by 27% of managers, and 38% said they have made changes to their investor reports to improve transparency.

While most hedge fund managers are resigned to the fact that closer regulatory scrutiny is coming, the survey also reported they were a little nervous about what form that might take, Chin says.

“The managers we interviewed understand there will be stricter regulatory oversight, and they’re preparing for it,” says Chin. “Our global survey respondents see this rapid transformation as proof the industry can effectively respond to investors’ needs. That’s a good sign for the future.”

(11/10/09)