29 May 2016

End of Hedge Funds?

Gloom and Doom may work for Marc Faber but it should not overshadow rational analysis of the Hedge Fund Industry.
Performance comparison with the S&P means to compare apples with oranges. And there are many different strategies that all have to be looked at from a different angle.
Costs have - and continue to be - high and it is not clear why megafunds should be able to charge fees of up to - and in extreme cases more than - 2 percent and at the same time charge performance fees of around 20 percent, often without application of any reasonable hurdle rate.
What has to - and will - happen is that the structure of traditional asset management and hedge fund management will slowly get unified.
Exceptional managers may be able to receive higher fees, but even in the traditional asset management space there is a wide variety of fee levels that investors seem to be happy to accept.
Careful scrutiny will be the order of the day when looking for 'active' managers. The trend to passive investing may continue for a while longer, it will stabilise when the passive part of assets under management reaches the 60-70 percent range. Sharp competition for the remaining 40-30 percent of the asset management cake will lead to a compression of fees.
Performance fees - not only for hedge fund managers, but also for private equity and other alternative fund structures - are problematic in any case. For good reason US regulators placed severe restrictions on their use until the mid-1980s. The way they are structured gives too much of a one way option for the providers of asset management services.
It may be the end of hedge funds as we know it (Business Insider)