"Though hedge funds outperformed in relation to equity benchmarks even in the most volatile markets, the industry as a whole failed to generate the positive returns that their investors had come to expect. The sophisticated investors that comprise the traditional hedge fund asset base are generally able to tolerate short-term volatility in pursuit of long-term performance. However, recent volatility has contributed to a disproportionate shake-out," said Howard Altman, the Co-Managing Principal overseeing the Financial Services Group at Rothstein Kass. "In this environment, many managers are getting back to basics, with 73 percent of survey respondents suggesting that family offices and individual investors represent very important sources of new capital in the year ahead. Intense competition for these assets and rising operating costs are expected to be catalysts for industry consolidation this year."
Research for "New World Order" was conducted in January 2009 by Russ Alan Prince, a leading authority and counselor on private wealth, and Hannah Shaw Grove, a widely recognized expert on behaviors and finances of wealthy individuals. The survey was based on telephone interviews with 239 hedge fund Senior Partners at US-based hedge fund organizations with at least $100 million under management and no less than five years in operation. Participating firms were segmented by assets under management, with roughly 65 percent of participants reporting assets under management between $100 and $500 million. The balance of firms reported assets under management in excess of $500 million. Among notable findings:
- 97.5% of survey respondents expressed a desire to source new capital
- 83.7% of senior hedge fund managers anticipate that competition for investors will dramatically increase
- 82.4% expect that hedge funds will be much more costly to operate 62.8% predict that M&A and restructuring activity among hedge funds will boom
- 64% of senior hedge fund managers predict that marketing will become much more important to success
- 98.7% of hedge fund managers expect that there will be increased regulation of hedge funds
- 61.1% of respondents reported that personal net worth had decreased by 30% or more
- 26.8% reported a decline in personal wealth of as much as 30%
"Perhaps the most remarkable shift in perception over the past few years relates to the outlook for industry regulation. In our initial report on alternative investment sector trends in 2007, approximately nine percent of hedge fund managers were expecting increased regulation. That percentage fell to under eight percent in 2008. With transparency issues taking center stage, that number has skyrocketed to nearly 100 percent in our latest report," said Mr. Altman. "While managers recognize that enhanced transparency has the potential to increase operating costs, many are broadly supportive of increased regulation. They recognize that legislation may help to restore investor confidence, leading to renewed asset flows over time."
"Our research also shows that hedge fund managers themselves experienced sharp declines in personal net worth in 2008. Most managers are heavily invested in their own products and tend to suffer or benefit alongside their clients," said Rick Flynn, a Principal in the Rothstein Kass Family Office Group. "Because hedge fund managers tend to be younger than other segments of the high-net worth population, they often overlook long-term planning requirements. Though many managers have ample time to recoup losses ahead of retirement, they should regularly evaluate and update estate and asset protection plans to insure appropriate levels of portfolio risk."
