22 November 2011

ABBL: Investors want greater board responsibility and accountability in key areas

The findings in the report, 'Coming of Age', were compiled by consulting firm Greenwich Associates for Ernst & Young. This year’s study polled 92 hedge fund managers who manage some US$600 billion, and 42 institutional investors with over US$130 billion allocated to hedge funds. “Despite the recent market volatility, the hedge fund industry has recovered significantly since the dark days of 2008. However, further to several on-going regulatory initiatives and the recent Weavering case in the Cayman Islands, investors are getting increasingly focused on board governance and oversight. In this respect there are significant gaps between the views of hedge fund managers and investors where there is a very strong view among investors that boards are more aligned to the interests of the managers than to those of the investors", says Michael Ferguson, EMEIA Regulated Funds Leader and Asset Management Leader at Ernst & Young, Luxembourg.

Despite several opinion gaps, investors and hedge fund managers agree on several issues, including their top concern: the impact of regulation, which is cited as the chief worry of 48 percent of hedge fund managers and 36 percent of investors.

Some key findings from the report are as follows:

Governance

Although managers and investors agree that independence is important for good governance, investors remain wary of boards’ effectiveness. 68 per cent of managers say the board of directors is effective in carrying out its duties, but only 45 per cent of investors agree.

Fund expenses

Higher costs for compliance, regulatory reporting and other infrastructure items coupled with the increased trend of outsourcing and extensive shadowing have resulted in margin compression across the industry. Hedge funds are increasingly evaluating how expenses should be shared between the investment manager and the fund. However, managers and investors differ on what costs should be passed through.

Succession planning

Managers underestimate the importance to investors of a clear succession strategy. Only 39 per cent of managers said they have a well-developed succession strategy, while 50 per cent of investors said they are confident with their hedge funds’ succession strategies. Hedge funds and investors also view loyalty differently. Over half of managers believe investor loyalty lies with the founding principals. However, 55 per cent of investors say their primary loyalty is to individual portfolio managers.

Investors are also more likely than hedge fund managers to want founding principals to increase their equity stakes. 83 per cent of investors say they want founding principals to have “skin in the game” and leave significant assets with the fund upon transition.

Press release

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