The focus on transparency, liquidity and flexibility are the primary drivers of the managed accounts phenomenon and accordingly, TABB Group estimates that assets in the industry invested through managed accounts will reach $790 billion by 2011, up from $468 billion in 2009.
However, cautions Simon, hedge fund managers said their investors are still attempting to understand the differences between having a managed account versus being in a hedge fund. The primary drawback for investors via a managed account, he says, revolves around day-to-day activity. “There are cost and administrative benefits to keeping up with portfolio transactions.”
Within the hedge fund structure itself, hedge funds are striving to protect their business. Focusing specifically on fees, TABB Group expects management and performance fees to decline over the next two years, even though they do appear somewhat stagnant today. Simon says, “Many wouldn’t be surprised to know that “2 and 20” is still alive and well. When weighted by assets under management, the reality is ‘1.75% and 21.93%’.”
Many small and medium funds are driving the trend downward, as the competition to appeal to investors is intense. With a limited supply of capital at hand, hedge fund managers are in a weak if not a precarious position to defend against fee reductions. While only 15% believe performance fees will decline over the next two years, nearly 25% say management fees will decrease.” Moreover, hedge funds that performed well during the past year are eager to lower their performance fees, further solidifying their marketing pitch.
Hedge funds tell TABB that they are attempting to convey confidence by implementing more liberal lock-up periods. Compared to a few years ago, the typical lock-up period has shortened. In 2006, says Simon, “it was approximately 13 months. Today it’s closer to 10.”
On the issue of hedge fund redemptions, the typical period of advance notice that an investor must provide a fund manager is 30 days. Other hedge funds requiring lengthier notifications told TABB that they are re-evaluating these terms, but as Simon points out, they expect no changes occurring in the near future. “They believe that the notification period is aligned with cash management best practices.“
“Because net asset value (NAV) calculations are provided less frequently from an administrator, this restricts how often investors can redeem their investment,” says Simon, adding, “Liquid strategies that are buying and selling stocks frequently are accustomed to providing daily liquidity, but illiquid strategies must respond to the fact that investors cannot hurt the entire pool.”
Addressing the issue of much ballyhooed gate provisions, Simon says they exist at nearly 25% of hedge funds. Explaining that legal signatures from investors permit their use, he says in some instances, these agreements are at the master fund level, while others may implement on an account-by-account basis. “Hedge funds tell us that not having gates is now a selling point.”
