Watson Wyatt, a consulting firm, publishes report concerning the future of hedge fund market and the role of skilled hedge fund managers during the time of significant consolidation and unprecedented changes to the regulatory landscape.
Despite greater market dislocations and weakened investment opportunities experienced by market for the last time Watson Wyatt anticipates best managers in the industry to emerge in a better position. The increasing numbers of skilled hedge fund managers are becoming more flexible in the negotiation of fees having been persuaded of the benefits of receiving long-term capital, provided by the likes of pension funds, rather than ‘hotter money’ which comes from other investors.
While we strongly believe skilled managers should be fairly compensated, fees are generally still too high for the value they deliver, particularly as we enter a lower-return environment, says Craig Baker, global head of manager research, Watson Wyatt. Also, performance fees introduced to align interests have been less than effective because they are generally poorly designed and tipped in managers’ favour. For a number of years we have been trying to rectify this situation and negotiate a fairer deal on fees, but only now we are seeing real progress.
Watson Wyatt asserts that long-term investors are likely to be the beneficiaries of this evolution, mainly through improved fee structures that better align interests. In addition, it suggests there will be certain hedge fund strategies that will struggle in future, given a fundamentally changed investment environment.
Other actual issues of the report are increased opportunities as a result of recent market dislocations; lower competition as the number of hedge funds declines; a reduction in the overall level of leverage; fewer competitive proprietary trading desks; and lower fees making them more attractive to investors.
In absolute terms, general hedge fund returns do not look good this year, but it is likely that they would have performed better than some other strategies, long-only equity funds for example, says Craig Baker. This has come about despite the well-publicised headwinds facing the industry in the last year. Notwithstanding, it is our belief that the current crisis will expose those that are not structured to add value for investors and will provide the most skilled with attractive opportunities and potential for substantial returns in the future.
L.D.