Tags: HEDGE FUND | INVESTORS | CREDIT CRISIS | FEES | CLIENTS

Yield-Hungry Investors Again Crave Hedge Funds

Tuesday, 20 Apr 2010 11:53 AM

Hedge funds will increasingly be able to dictate fee levels to investors and turn away troublesome clients as renewed appetite for these freewheeling funds' returns hands power back to fund managers.

Investors got used to holding the whip hand during the credit crisis as hedge funds had to hand back hundreds of billions of dollars to clients, leaving managers desperate for assets and in a weaker position to haggle on fees.

However, investors are now finding many funds have both healthier-looking client lists after last year's 20-percent returns and long memories when it comes to which investors deserted them during the tough times.

Downward pressure on hedge funds' lucrative fees has evaporated, executives say, and they look unlikely to fall further now that demand and performance have picked up.

"I don't think (that fees will fall further)," said Thames River Capital's Ken Kinsey-Quick, whose portfolios invest in hedge funds. "This is where supply and demand seems to be settling."

The well-known structure of 2 percent annual management fees and 20 percent performance fees, commonplace before the financial crisis, has come under pressure as investors pulled out $330 billion in the year to June 2009, according to Hedge Fund Research (HFR).

This has helped force down management fees to 1.5 percent, although performance fees are still around 20 percent, according to hedge fund executives and median figures from data group Preqin.

However, times have changed.

Clients injected nearly $15 billion net into hedge funds in the second half of 2009, according to HFR, and this looks to be accelerating this year, particularly as returns continue to hold up. Figures from TrimTabs Investment Research and BarclayHedge show net new investments of $16.6 billion in February.

"If you're in a seller's market you can dictate terms," said Antonio Borges, chairman of the Hedge Fund Standards Board (HFSB), which sets best practice standards for hedge funds.

Further falls in fees also look unlikely because investors are unlikely to buy into cheap 'bucket shop' hedge funds, which charge low prices for poorer performance.

Instead, hedge funds are more likely simply to shut down as investors pull out and move money to more expensive but better-performing funds.

"Hedge funds don't seem to have normal demand curves as there seems to be almost no sensitivity of demand to the price charged. Indeed it seems as if sometimes hedge funds see greater demand if they are 'reassuringly expensive'," said Bill Maldonado, head of alternative investments at HSBC's Halbis unit.

"I think this is what economists refer to as a good of ostentation. All this holds true whilst performance is good. If performance is poor then clients will not be interested at any price of course."

Some funds are also exercising their renewed power by shunning funds of funds or wealthy clients that aggressively pulled out all their money during the credit crisis and now want to invest again.

This is often done by halting marketing to such investors or refusing fee discounts, which funds of funds often need. This effectively lets funds 'clear out' their investor lists and increase the proportion of institutional investors, who tend to be longer-term investors and who continued to put money into hedge funds during the crisis.

One London-based fund of funds manager, who spoke on condition of anonymity, told Reuters he was now finding it harder to invest in some funds.

"Many managers don't want the other ones (investors)," said the HFSB's Borges. "They're very upset they left in large amounts... They're turning away high net worth individuals and maybe some funds of funds that are more demanding on liquidity."

Thames River's Kinsey-Quick said some managers are unwilling to take funds of funds money, although it had not happened to him, and said his firm in turn is also shunning some investors.

"There are some family offices we won't take money from. (There is one we won't take money from) because of a bad experience in 2008, it was the way they dealt with the whole thing."

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Hedge funds will increasingly be able to dictate fee levels to investors and turn away troublesome clients as renewed appetite for these freewheeling funds' returns hands power back to fund managers. Investors got used to holding the whip hand during the credit crisis as...
HEDGE FUND,INVESTORS,CREDIT CRISIS,FEES,CLIENTS
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2010-53-20
Tuesday, 20 Apr 2010 11:53 AM
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