An investor survey by hedge fund data provider Prequin reveals that because of the recent Madoff scandal institutional investors will be carrying out more stringent due diligence on potential managers, and evaluating how much value hedge fund investments represent.
Survey co-authors Amy Bensted and Ben Cluny, say: "Many institutional investors are demanding lower fees, often in return for locking their capital away for longer, as a response to poor performance of numerous strategies."
However, according to the survey, investors said that although returns are lower than they had been previously, hedge funds were still one of the best performing aspects of their investment portfolio.
A number of the more sophisticated investors indicated that they expected returns to drop in light of market conditions and were therefore unsurprised by the performance levels. Although the returns were down on previous years, they saw the investments as more long term and believed that in the next 12-24 months returns would pick up in light of a number of potential new investment opportunities.
A total of 38 per cent of those investors surveyed said that they were unsatisfied with returns.
Due to the market conditions, very few investment funds across all asset classes have achieved positive returns. Although these investors believe that returns have fallen short, most were looking to continue investing in the asset class and felt that hedge funds would produce good returns in the medium to longer term.
A total of 9 per cent stated that returns had exceeded expectations, and more than half of all institutional investors were satisfied with the returns of their hedge fund portfolios in 2008.
Some funds have managed to benefit from the financial conditions, such as those taking short positions on certain financial institutions and a small percentage of investors, who had successfully chosen and gained access to these funds, achieved very significant returns.
The authors conclude: “It clear that institutional investors look set not only to remain as a key part of the industry, but also to rise in importance as new sources of capital for hedge funds, and managers need to understand exactly what these investors are demanding if they are to survive these uncertain times.”
Performance of hedge fund strategies over the past year
Source: Financial Express Analytics
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