Assets in Hedge Funds' Managed Accounts to Rise Nearly 70% by 2011 Based on Efforts in Meeting Investor Concerns, TABB Group Says

Hedge Funds are Launching Liquid Strategies, Shortening Lock-Ups

TABB Forecasts $25 Billion in Management Fees Will Be Collected by End of 2010

• Press Release
• Source: TABB Group
• On 10:45 am EST, Wednesday November 4, 2009

NEW YORK & LONDON--(BUSINESS WIRE)--The hedge fund industry, putting the frightening days of 2008 far behind them, are taking a series of steps to recapture assets. Addressing concerns over transparency, liquidity and fraud are top of the list announced today in a new study published today by TABB Group, the capital markets research and consulting firm.

Across the 62 US hedge funds managing nearly $130 billion in assets under management (AuM) who participated in the research study, 77% tell TABB that investors’ three top concerns are operations, safety of strategy and liquidity risk. Matt Simon, TABB research analyst and author of the new study, “US Hedge Funds 2009: Fees, Redemptions and Managed Accounts,” says investors are now asking more questions on topics previously seen as a minor part of the due diligence process, from safety and soundness of assets, to greater insight into the investment process, including actual holdings.

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.”

The 34-page study with 33 exhibits is available for download by TABB Group Equity Research Alliance clients and all pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.

Other recent related TABB Group research includes “Prime Brokerage 2009: The Hedge Fund Perspective,” also written by Matt Simon. The 45-page study with 40 exhibits provides the capital markets industry an in-depth analysis of hedge fund/prime brokerage relationships. It is based on interviews with over 60 US-based hedge funds, supplemented by discussions with prime brokers and directors at leading global investment banks. Hedge funds interviewed represent nearly 10% of total US-based hedge fund assets.

About TABB Group

TABB Group is the financial markets industry’s only research and strategic advisory firm focused exclusively on capital markets, with offices in New York and London. Founded in 2003 and based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager and broker, to exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com.

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Martin Rabkin, 914-420-5739
mrabkin@martinrabkinink.com