Investor survey reveals disappointing year for hedge fund returns

Hedge funds had a disappointing year, according to a study by UK-based alternative assets research firm Preqin that reveals 40 per cent of investors surveyed feel that returns on their investments have failed to meet expectations in the past 12 months.

The survey of 50 institutional investors also shows that just 11 per cent feel that returns from their investments exceeded expectations in the past 12 months. Investors also report that issues of hedge fund transparency and fees are still a concern.

The results come on the back of some asset owners looking to boost their allocation to hedge funds in light of recent volatility in equity markets and near-record low yields on some government bonds.

As part of the study Preqin also sorted information from 2000 single-manager hedge funds to track management and performance fee data.

When it comes to fund managers, it seems that the number of funds charging the traditional 2/20 fee structure continues to decline, down to 29 per cent of managers surveyed.

The mean management fee was 1.6 per cent and the mean performance fee reported was 19.2 per cent.

Across all managers, 79 per cent charged 20 per cent performance fees; and 40 per cent of managers reported charging a 2 per cent management fee.

Preqin found that the proportion of investors who believed returns exceeded or were in line with expectations had fallen by 11 percentage points to 60 per cent since 2010.

This represents the lowest proportion in the past four years. In addition, 28 per cent of investors reported that returns have failed to meet their expectations since 2010.

Preqin hedge fund data manager Amy Bensted (pictured) says dissatisfaction with hedge fund performance will be of concern to the industry, but notes that funds are continuing to provide flexibility when it comes to fees.

“Changes to the hedge fund industry are likely to continue apace as cautious institutional investors seek the best possible fund terms from their fund managers,” Bensted says.

“Fees are of great importance to investors, and it is probable that managers will carry on moving away from the two-and-20 structure. Dissatisfaction with hedge fund performance will be of concern to the industry, and managers will have to listen to their clients to ensure that they keep them on side.”

After struggling to attract investors after the financial crisis, with investors wary about transparency and liquidity issues, it would seem that hedge funds are gaining back lost ground when it comes to negotiating power.

The number of investors that reported that terms and conditions have shifted in their favour over the past 12 months dropped dramatically.

In 2010, 65 per cent of investors reported improvements in their terms and conditions, compared to just 35 per cent this year. This year 65 per cent reported no change in their terms and conditions.

But fees seem to be less of a make-or-break issue for investors than in previous years, with 47 per cent surveyed this year saying they had rejected a fund-based fee structure in the past 12 months. This compared to 65 per cent in 2010.

One-third of investors reported that managers were prepared to charge lower fees in return for longer lock-up periods.

Bensted says managers that are prepared to be flexible on fees and conditions are more likely to attract investors, particularly in light of the dissatisfaction reported by investors over fund returns.

“If managers continue to respond to demands from institutional investors, positive inflows will remain in the industry, with the managers best able to adapt to the demands of investors reaping the largest rewards,” Bensted says.

Half of investors said they would like to see improvements in the transparency of hedge funds, but at the same time, 44 per cent said they had seen the most improvement in this area over the past 12 months.

Performance fees were also an area almost half of respondents wanted improvements in; only 11 per cent reported seeing the most improvement in this area from hedge funds.

More than a third of funds were also concerned about redemption fees, and 17 per cent were concerned about lock-up periods.