A recent Preqin survey of over 50 institutional investors painted a mixed picture of investor satisfaction with hedge fund terms, and found fees and transparency to be the main issues for investors. In 2011, 40% of investors felt that their hedge fund investments did not perform as expected, up from 28% in 2010, and comparable to 2008 levels. When investor satisfaction is low, fund terms are scrutinized, and unfavourable terms could deter investors. 35% of respondents felt fund terms had become more favourable to investors over the past year. Encouragingly, no institutions surveyed believed that fund terms had worsened for investors during 2011, although the pace of improvement had slowed compared to the previous year.
The past 12 months have seen improvements in transparency as investors have increasingly required managers to account for returns. Other Preqin research has also shown an increase in appetite for managed accounts, as investors are attracted by the higher level of transparency these investments provide. 44% of investors believed transparency to be the most improved area of fund terms over the past 12 months, but a further 50% felt that managers can still do more to improve transparency and become more attractive to institutional investors.
Fees remain a key issue for hedge fund investors, with almost half of those surveyed wanting to see lower performance and management fees going forwards. Preqin has found that pressure from investors has caused the traditional 2% management fee to fall to 1.6%. However, during this time of investor dissatisfaction, performance fees are important issue, with only 11% of investors seeing positive gains in this area over the past 12 months. With 40% of investors unhappy with the performance of their hedge fund investments, managers must work harder to justify their performance incentives.
The issue of fees is increasingly important to investors, and the departure away from 2&20 fees looks set to continue in the coming months. The mass redemptions seen in 2008 have been mostly avoided so far in 2011, but managers must continue to listen to investors and adapt in order to attract institutional capital.