Hedge funds expect regulation, added costs

This year is not going to be easy for hedge fund managers, according to a survey of the managers themselves. While almost all want to raise new investment capital, nearly 84% expect competition for qualified investors to be fierce, according to a survey by New York–based CPA firm Rothstein Kass.

“Though hedge funds outperformed in relation to equity benchmarks even in the most volatile markets, the industry as a whole failed to generate the positive returns that their investors had come to expect,” said Howard Altman, co-managing principal overseeing the financial services group at Rothstein Kass. “The sophisticated investors that comprise the traditional hedge fund asset base are generally able to tolerate short-term volatility in pursuit of long-term performance. However, recent volatility has contributed to a disproportionate shake-out.”

Affluent individual investors are likely to hear more sales pitches. Managers with under $500 million in assets were more likely to deem high-net-worth investors “very important” sources of capital, at 76.8%, compared to 65.9% of managers with over $500 million in assets.

“In this environment, many managers are getting back to basics, with 73% of survey respondents suggesting that family offices and individual investors represent very important sources of new capital in the year ahead,” said Altman. “Intense competition for these assets and rising operating costs are expected to be catalysts for industry consolidation this year.”

Single family offices were ranked next after affluent individuals, with 46.4% of smaller managers saying they were very important, and 56.1% of larger managers agreeing.

Nearly 99% of managers expect policy-makers will follow through on threats of new regulation, and 82.4% expect that hedge funds will be much more costly to operate in 2009.

“In our initial report on alternative investment sector trends in 2007, approximately 9% of hedge fund managers were expecting increased regulation,” said Altman. “While managers recognize that enhanced transparency has the potential to increase operating costs, many are broadly supportive of increased regulation. They recognize that legislation may help to restore investor confidence, leading to renewed asset flows over time.”

(03/09/09)