With values running 25% below peak, they can’t charge full fees
Reuters 14 October 2009
(NEW YORK) Hedge funds have rallied from last year’s stunning losses, yet hundreds of managers face some tough decisions in the coming weeks.
The fund industry suffered one of its worst years ever last year, when the average hedge fund fell by 19 per cent amid tumbling markets, exacerbated by record withdrawals.
Yet even as managers quickly mounted a comeback - the average fund rose 17 per cent over nine months - roughly 10 per cent of the industry’s 8,000 hedge funds may remain deep in the hole by year-end.
‘The high water mark outlook will be a lead story going into the last six weeks of the year,’ Credit Suisse global head of prime services Philip Vasan said in an interview.
Before markets began rallying in March, a number of Wall Street executives warned that a large chunk of the industry may face pressure to shut down or suffer staff departures.
The reason: funds cannot charge full fees, usually 20 per cent of profits, until they exceed their ‘high water mark’ or peak value.
Without these performance fees, fund managers may be hard pressed to pay annual bonuses or even meet overhead costs. In some cases, firms will close funds. Star traders may defect to rivals or, increasingly, strike out on their own.
‘A number of high quality people who would never have left their firms are deciding that if they have to work for free, they might as well build a business for themselves,’ said Deutsche Bank global prime finance co-head Barry Bausano.
Credit Suisse research determined that about 45 per cent of the funds were at or above their high water marks going into last month. Another 20 per cent were down by 10 per cent, or within striking distance in a reasonable period.
But a quarter of all funds were 20-30 per cent down. At the low end of that range, managers needed to rally 43 per cent just to break even.
With so much at stake, Wall Street is poring over hedge fund performance data. And so far this year, strong returns have quieted dire predictions, especially among the largest and best known funds.
It is difficult to generalise in an industry with dozens of different strategies and where individual fund performance varies so widely.
Even within the ranks of the hardest hit funds, there are many circumstances that could convince managers and their clients to stay the course. For one thing, funds will consider if they are close and can surpass peak levels early next year.
Some firms are attracting new capital, which pay performance fees at lower fund values. Others have renegotiated terms with investors, agreeing to lower fees for an extended period rather than receive no fees this year.
The big shake-out also will not be felt equally across the board. Among funds with less than US$500 million: 12 per cent were down 30 per cent or more, compared with 6 per cent of big funds.
‘Most of the consolidation will be outside the top 5 per cent of funds,’ Mr. Bausano said. ‘So will a couple of thousand funds close? Absolutely; but the majority will be three guys in a garage . . . rather than more established managers.’
1 comment:
Hedge fund industry faces big shake-out
With values running 25% below peak, they can’t charge full fees
Reuters
14 October 2009
(NEW YORK) Hedge funds have rallied from last year’s stunning losses, yet hundreds of managers face some tough decisions in the coming weeks.
The fund industry suffered one of its worst years ever last year, when the average hedge fund fell by 19 per cent amid tumbling markets, exacerbated by record withdrawals.
Yet even as managers quickly mounted a comeback - the average fund rose 17 per cent over nine months - roughly 10 per cent of the industry’s 8,000 hedge funds may remain deep in the hole by year-end.
‘The high water mark outlook will be a lead story going into the last six weeks of the year,’ Credit Suisse global head of prime services Philip Vasan said in an interview.
Before markets began rallying in March, a number of Wall Street executives warned that a large chunk of the industry may face pressure to shut down or suffer staff departures.
The reason: funds cannot charge full fees, usually 20 per cent of profits, until they exceed their ‘high water mark’ or peak value.
Without these performance fees, fund managers may be hard pressed to pay annual bonuses or even meet overhead costs. In some cases, firms will close funds. Star traders may defect to rivals or, increasingly, strike out on their own.
‘A number of high quality people who would never have left their firms are deciding that if they have to work for free, they might as well build a business for themselves,’ said Deutsche Bank global prime finance co-head Barry Bausano.
Credit Suisse research determined that about 45 per cent of the funds were at or above their high water marks going into last month. Another 20 per cent were down by 10 per cent, or within striking distance in a reasonable period.
But a quarter of all funds were 20-30 per cent down. At the low end of that range, managers needed to rally 43 per cent just to break even.
With so much at stake, Wall Street is poring over hedge fund performance data. And so far this year, strong returns have quieted dire predictions, especially among the largest and best known funds.
It is difficult to generalise in an industry with dozens of different strategies and where individual fund performance varies so widely.
Even within the ranks of the hardest hit funds, there are many circumstances that could convince managers and their clients to stay the course. For one thing, funds will consider if they are close and can surpass peak levels early next year.
Some firms are attracting new capital, which pay performance fees at lower fund values. Others have renegotiated terms with investors, agreeing to lower fees for an extended period rather than receive no fees this year.
The big shake-out also will not be felt equally across the board. Among funds with less than US$500 million: 12 per cent were down 30 per cent or more, compared with 6 per cent of big funds.
‘Most of the consolidation will be outside the top 5 per cent of funds,’ Mr. Bausano said. ‘So will a couple of thousand funds close? Absolutely; but the majority will be three guys in a garage . . . rather than more established managers.’
Post a Comment