One could hardly call their protests cacophonous, but hedge fund investors have certainly made it clear how they aren’t going to back down on a fight against transparency, i.e. investors getting a close look at what the guy or gal they’re handing over millions to is doing with the cash and what they’re paying those hefty fees for.
Regardless, transparency is what investors are after and finally getting, judging by the litany of surveys and research reports of the last few months that suggest not only higher demands on the investor side but more concessions on the fund manager side. The latest salvo, a survey of the future of the global fund management industry by Scandia Investment Group (click here to download the full report; click here to download the summary press release), hits as several demands hedge fund managers can and should expect from their investors headed into 2011. Naturally, transparency is a ready source of ammunition.
“One distinctive aspect of this year’s survey is the desire for greater transparency from fund selectors,” the report begins, with the caveat that investors in particular believe that hedge funds are okay – so long as you can see what you get. Part of that demand is also coming from the regulatory front, where the current strategies in favor follow the UCITS platform, which demands more stringent and detailed reporting, and where hedge fund managers are now forced to report more detailed information to various market watchers. Some 85% of survey respondents said they expect to spend more time managing regulatory issues over the next 12 months. The annual survey questioned 40 fund management groups with combined assets under management of over $2 trillion.
Still, despite expectations of more poking, prodding and nudging, asset managers see 2011 as being packed with opportunity for those able to position themselves strategically, especially for those focused on risk targeted funds with investors looking for more certainty in terms of risk rather than returns.
Broadly speaking, almost 60% of survey respondents said they expect to see assets under management gradually expand next year, with over a quarter of expecting a significant increase. (See chart below.)
Some 62% said they expect the level of demand for risk targeted funds to increase next year, while none of those questioned thought demand would decrease. Multi-manager investing also took home the popularity contest prize: almost two-thirds of those surveyed said they think it will be the fastest growth next year.
The survey also revealed that the use of platforms by asset managers is set to surge over the next three years, with 71% of those surveyed noting that at least 25% of their current retail business comes via a platform and 79% indicating their business will see a further increase in platform use over the coming years.
Of course, there’s always a price to be paid, not that the majority of those Skandia Investment Group surveyed don’t already know it. Roughly 65% of those polled said they expect to see the use of performance fees increase further over the next 12 months, with equal expectations that annual management charges will also come under increased pressure, mostly thanks to the rise of passive products such as ETF’s. The chart below shows responses on whether performance-related fees will increase into 2011 – the gray color represents expectations of an increase.
Meanwhile, a whopping 87% believe that institutional investors are more prepared than they were previously to accept performance-related fees as a way of rewarding good performance, though 43% believe this is not the case of retail investors. And there were other thematic concessions, including expectations of consolidation and resignation of additional regulatory burdens, which of course take more time and money to deal with. Some 85% of those surveyed said they expect to spend more time managing regulatory issues in 2011.
“The overriding feeling from the survey is that 2011 could be an extremely important year for the asset management industry with firms positioning themselves to benefit from an unfamiliar future.”
With money managers of all stripes enduring more regulatory oversight, lifting their kimonos for allocations while simultaneously trying to both earn a decent living from a decent return. 2011 could very well be a watershed year in terms of who survives, thrives and doesn’t.
Indeed, as market conditions improve and as hedge funds in particular show their true grit and salt, a new uproar of “We’re not going to take it anymore!” sentiment will emerge.
We’re keeping our ears to the tracks.