The Current State Of Play

A survey sponsored by KPMG

Originally published in the April 2009 issue

In this survey we asked managers a series of questions under the following broad headings:

• Regulation
• Public image
• Investors
• Business specifics

The responses we received can be broadly summarised as follows:

• Further regulation/supervision is welcome
• Yes, the industry has a poor public image but this image can be improved
• Due diligence is now far more thorough and onerous
• Yes, managers are cutting costs

It seems that as far as the manager community is concerned there is a general feeling that the UK regulatory regime has got things just about right. Manager authorisation works well in the UK and the manager authorisation process is an onerous one, were comments repeated on several occasions. That said, a number of managers seem to think that a proper short selling regime should be adopted but that there ought to be a common international reporting regime with component parts (dealing with aggregation, thresholds, frequency, timing etc.) that are common and agreed upon across all markets. On leverage levels a number of managers referred to the relatively low leverage levels deployed by their funds.

A number of managers suggested that the number of firms that are ‘relationship managed’ could usefully increase. The FSA has a specialist supervisory team that maintains strong relationships with the large hedge funds (in terms of size – say the top 30-40 funds) but it was felt that more regular dialogue with a greater number of managers on issues such as counterparty risk, leverage, crowded trades, short selling, compensation, redemption provisions, gates, suspension of NAVs, side pockets etc. could be very useful. A more formalised approach to direct supervision of all managers, not just the large ones, would be good, said some.

On the subject of public image, better communication with, and education of, the mainstream press (and even politicians) is the way to improve the industry’s public image, say the managers we surveyed. Very few managers thought the parlous position beyond redemption and lots of managers expressed their view that a determined and concerted effort be made to deal with the image problem.

Investors are clearly displaying more rigour when it comes to due diligence. We got the impression that this was a state of affairs that had existed for some considerable time. But certainly events post-Lehman had brought certain issues (counterparty risk, custody notably) under the microscope.

Note: In conducting this survey we spoke to 20 managers who manage in aggregate circa US$65 billion

A sample of responses

  • 80% of managers were supportive of more regulation and supervision. Those who were not supportive felt there was already adequate regulation and supervision
  • Most managers believe further regulation is inevitable
  • Most managers support targeted measures that improve market efficiency and reduce the ability of any participant to abuse the market in any way
  • Some managers posed the question – does the regulator have sufficient well trained people to interpret the data they currently see, or put another way, do they understand what they are seeing?
  • Some managers saw further regulation as just another sign of the maturing of the hedge fund industry; the current crisis has just hastened this process
  • Increased regulation adds greater credibility and legitimacy to the industry and as such, if properly regulated, then more assets will flow into the industry
  • It is crucial that the FSA avoid over-reaction to what may appear to be breaches of regulations; the idea of a ‘grace period’ would be helpful; also the FSA should try to form real industry partnerships to avoid a poacher/gamekeeper relationship

A sample of responses

  • The industry has a poor public image
  • Hedge funds are specialist operations within a very specific industry – an industry which is full of diversity, uniqueness and entrepreneurial spirit…this has raised the consciousness of the retail investor but not all investors should consider investments in hedge funds
  • Improving processes and procedures will help
  • A small number of managers felt the industry could not improve its image and could probably not overcome the perception that short selling is bad – it’s a cultural issue, said one manager, that is not well understood by the media, politicians or the public
  • The mainstream media deliberately set out to permeate a poor image of the media, another sees a clear industry divide between European and Anglo-Saxon politicians
  • Does it really matter if the industry has a poor public image?
  • The industry is far too secretive. The industry needs to explain in relatively simple terms – what, how and why – it does
  • The industry has done a poor job of communicating its message

A sample of responses

  • Assurances on liquidity management, risk management and operational management issues is key to attracting real sustainable fund flows
  • Investors were very agitated in 2H of 08; they were less so in Q1 of 09.
  • More reassurance required on all matters
  • You have to be commercial and realistic and understand that whilst performance is still one of the key drivers, volatility of earnings is increasingly important
  • There are lot more questions about client base, redemption levels and asset flows
  • Lots more focus on risk management

On UCITS and retailisation

  • Let’s innovate whilst accepting that care should be taken
  • Retailisation is generally a good thing
  • It is not clear that these products [UCITS] are suitable for retail investors
  • Yes, due diligence has got much harder

A sample of responses

  • We are doing more business risk assessment
  • All of these items are subject to ongoing development and focus and so no change as a result of recent events

To download full survey, please click here.