According to “New World Order,” the third-annual report on alternative industry trends released by Rothstein Kass, 83.7% of survey participants expect that competition for hedge fund investors will dramatically increase, with new investors expected to represent the primary source of new capital to the sector.
Amid rising operating costs and an enhanced regulatory focus on the industry, 79% of senior professionals also agreed that hedge funds will revert to being a niche investment class.
Participating firms were segmented by assets under management, with roughly 65 percent of participants reporting assets under management between $100 and $500 million. The balance of firms reported assets under management in excess of $500 million. Among notable findings:
-97.5% of survey respondents expressed a desire to source new capital;-83.7% of senior hedge fund managers anticipate that competition for investors will dramatically increase;-82.4% expect that hedge funds will be much more costly to operate;-62.8% predict that M&A and restructuring activity among hedge funds will boom;
-64% of senior hedge fund managers predict that marketing will become much more important to success;-98.7% of hedge fund managers expect that there will be increased regulation of hedge funds;-61.1% of respondents reported that personal net worth had decreased by 30% or more;
-26.8% reported a decline in personal wealth of as much as 30%.
“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,” says Howard Altman, the co-managing principal, 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.”
“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. Intense competition for these assets and rising operating costs are expected to be catalysts for industry consolidation this year.”
“Our research also shows that hedge fund managers themselves experienced sharp declines in personal net worth in 2008,” says Rick Flynn, principal, Family Office Group, Rothstein Kass. “Most managers are heavily invested in their own products and tend to suffer or benefit alongside their clients.”
“Because hedge fund managers tend to be younger than other segments of the high-net worth population, they often overlook long-term planning requirements. Though many managers have ample time to recoup losses ahead of retirement, they should regularly evaluate and update estate and asset protection plans to insure appropriate levels of portfolio risk.”
L.D.