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COLUMN –Investors return to hedge funds: Margaret Doyle

July 10, 2009

Margaret Doyle is a Reuters columnist. The opinions expressed are her own

By Margaret Doyle

LONDON, July 10 (Reuters) – If fear and greed are the motivating forces in financial markets, then greed appears to be in the lead again. Hedge funds had a torrid 2008 – losing money, barring withdrawals, displaying abysmal due diligence and even shutting down – despite the industry’s promise of “absolute return”. However, figures released by Eurekahedge show that investors are returning to the industry.
There are plenty of reasons to stay away. There is an old joke that a hedge fund is a remuneration scheme masquerading as an asset class. One of the few things that the industry has in common, across a multiplicity of investment strategies and styles, is its proclivity for hefty fees.
The industry has always defended “two and twenty”– 2 percent management fee and 20 percent of the annual return above a certain threshold – on the grounds that supe rsmart hedgies would outperform their rivals at dull long-only fund managers. Moreover, because the industry focused on “alpha” – the industry jargon for returns that are uncorrelated to market returns (“beta”) – the idea was that hedge funds would deliver “absolute” (rather than relative) returns. They might not beat, or even meet, market returns in the good years, but they would not lose it in the bad years.
2008 put paid to that theory. Moreover investors discovered that many of the previous excess returns were derived from excess leverage rather than super smarts. Worse, when investors tried to redeem their depleted capital, many funds invoked the small print to gate their funds.
The coup de grace was (or ought to have been) the revelation that several of those who invested with the fraudster, Bernie Madoff, were funds of hedge funds which had been charging a further layer of fees, supposedly to do due diligence.
In some ways, the investing environment is getting worse: regulators around the world are bearing down on the industry in a way they never did before and credit has dried up.
This tale of woe ought, at the very least, prompt those re-investing in hedge funds to demand better terms. Some distressed hedge funds have already refunded or reduced fees. In addition to smaller fees, investors ought to be clearer on when and on what terms they can get their money out.
Unfortunately, the signs are that healthy hedge funds are making few or no concessions on fees. For example, Man Group, Britain’s biggest listed hedge fund, reported that its gross margin on private investors remained “robust” in the year to the end of march, slipping slightly to 4.33 percent, and remains strong. Yet retail inflows exceeded outflows in the quarter to the end of June.
With investors’ memories this short, perhaps it should not surprise us that fund managers hold fast to their fees.

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  • About Margaret

    "Margaret Doyle is a Reuters Breakingviews columnist, based in London. She writes about investment banking. She has been a journalist for over 14 years. She has written for The Daily Telegraph and The Economist and presented various radio programmes for the BBC. She began her career as a consultant at McKinsey & Co. She has an economics degree from Trinity College, Dublin and an MBA from Harvard Business School, which she attended as a Fulbright scholar. She is a Conservative Member of Westminster City Council."
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