Diminishing returns from many hedge funds and the Madoff fraud have caused institutional investors to intensify their due diligence on hedge funds, and demand more liquidity, transparency and lower fees, according to research from alternatives specialist Preqin.
Preqin, a UK firm, surveyed 50 institutional investors in late January to learn whether the ailing performance of many hedge funds and the Madoff scandal had altered their investment criteria for hedge funds.
Participants included pension funds, endowments, banks and insurance companies holding between US$100 million and US$35 billion in funds under management.
Of these respondents, 43 per cent said that less opacity from hedge funds would be essential if the managers aimed to hold mandates or win them in the future.
One endowment commented that hedge funds often provide “lots of verbiage and no detail”.
Increased liquidity and the ability to make quick withdrawals from funds – especially in bad times – were also seen as mandatory requirements for future mandates.
Hedge funds could also expect demands to cut their fees – approximately 35 per cent of respondents felt they had more power now to impose lower fees on managers.
Respondents also stated their preference for hedge funds to employ independent administrators.
Some funds, notably Swiss-based Union Bancaire Privee, which held a US$700 million exposure to Madoff, have publicly threatened to redeem mandates with funds that do not appoint independent administrators.