Seeders have an invaluable opportunity to reform long-standing shortcomings in the hedge fund industry, an Amsterdam-based incubator has said.
“Based on conversations I have had with investors, many of them are still disappointed with hedge funds’ lack of transparency and their fee structures,” said Jeroen Tielman, chief executive officer and founder of IMQubator (IMQ), a seeding company, which has just seeded its eight fund.
Many hedge funds sought to stifle investor dissatisfaction following the crisis by reporting data more frequently and lowering their fees from the traditional 2% management and 20% performance fee. However, there are fears that some bad old habits might be resurfacing despite hedge funds enduring a torrid 2011 with the HFRI Fund Weighted Composite Index posting declines of 5.4% year-to-date (YTD).
“Investors are becoming more hesitant about allocating to hedge funds, which is a shame because there is a lot of talent out there. Seeders, therefore, have to do something about this and need to demand greater transparency and fairer fees,” highlighted Tielman.
There are also worrying signs that hedge funds are becoming less accommodating towards their investors. Only 35% of investors surveyed by research specialists Preqin said investment terms had shifted in their favour this year compared with 61% in 2010. However, it is important to note that not one investor said fund terms had changed in favour of the manager. Tielman also doubted hedge funds would revert to behaviour of old. “There has been an irreversible trend and many managers and investors have learned a lot from the crisis,” highlighted Tielman.
Nevertheless, there are concerns that some investors exercise unfair pressure on hedge funds. There are fears in some quarters that excessive fee concessions could lead to performance drag on start-ups, which might potentially result in businesses becoming unsustainable. “Seeders have to be fair and ensure the business can run itself on the fees investors pay,” he acknowledged.