Nearly 60% of hedge funds facing increased costs: Ernst & Young survey

Combined with downward pressure on fees, conditions ripe for a perfect storm

TORONTO, Dec. 6, 2012 /CNW/ - Nearly 60% of hedge fund managers in North America say the cost of business has increased in the past year. However, there continues to be a disparity between managers' and investors' views about what costs should be borne by the fund.

"Our survey found that 68% of funds passed along these increased costs — up from only 34% in 2011," says Joseph Micallef, Financial Services Partner and Canadian Asset Management Industry Tax Leader at Ernst & Young. "There will continue to be a greater push and pull on this issue of cost allocation for the foreseeable future as investors increasingly show less appetite for costs to be charged to the fund than they did a year ago. We don't see this trend changing unless funds greatly improve investment performance returns."

Ernst & Young's Global hedge fund and investor survey 2012: finding common ground also finds that while investors certainly consider a fund's performance when deciding whether to invest or discountinue their investment with a particular fund, it's not — contrary to what most fund managers believe — their top consideration.

"Long-term performance is only the fourth most important criteria for investors, after the investment team, investment philosophy and risk management policies," says Micallef. "Compared to 2011, both long-term and short-term past performance declined in importance for the investor community."

This was a topic that interested managers and investors alike at Ernst & Young's Global Hedge Fund Symposium in Toronto last night. Participants also discussed the issue of hedge funds having to make increased investments in headcount and technology in order to meet increasing regulatory burden and prepare for expected growth, despite the fact that survey results indicate 85% of investors don't believe more regulation will effectively prevent another crisis.

"With the cost of doing business increasing, and investors not ready to foot the bill, conditions are ripe for a perfect storm. There are more barriers to entry for startups, and we're seeing consolidation among those that don't yet have capital to support investment in new infrastructure," adds Micallef. "But, while the storm is likely to persist in the short term, there are still investments to be found. Managers who are creative about where they seek these untapped investment capital dollars will thrive."

About the global hedge fund and investor survey
Greenwich Associates, a global research and consulting firm, interviewed 100 hedge funds representing over US$710 billion in assets under management, and the views of 50 institutional investors representing over US$715 billion in assets under management. The objective of the study was to record the views and opinions of hedge funds and hedge fund investors globally, measure the views of each on the same topics and examine the two groups together. Hedge funds and hedge fund investors were asked to comment on investor demand and hedge fund selection; headcount, infrastructure and costs; administration; eurozone considerations; regulations and reporting; compensation structure; and the future landscape.

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SOURCE: Ernst & Young

Erika Bennett
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Julie Fournier
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