Northern Trust European hedge fund industry survey: Perceived lack of transparency deters institutional investors
Transparency in European hedge fund managers' operations has emerged as a new and universal concern for institutional investors, according to a new survey.
The findings of the comprehensive new survey into the pan European hedge fund industry are published this week in a Northern Trust white paper entitled 'The 'Forced' Institutionalisation of the Hedge Fund Industry'.
In the survey, carried out early in 2006, 100 per cent of fund of hedge funds respondents stated that there would need to be further transparency in a hedge fund manager's operations to encourage more investors to allocate to hedge fund strategies in future. Furthermore, approximately seven out of ten (69 per cent) felt that failure to address this concern would hinder the growth of the sector.
Marc Russell-Jones, Vice President, Global Fund Services, at Northern Trust, said: 'The transparency debate is now evolving to include more focus on the operational - and not just the portfolio level - aspects of a hedge fund manager's business. At the same time, in our opinion, the concern with operational transparency seems to be feeding the trend for hedge fund managers to outsource their core custody and fund administration services to independent third party providers. In our survey, 99% of hedge fund and fund of hedge funds managers said they outsource these functions. In doing so, hedge fund firms are better able to focus on core portfolio management and operational oversight which, our survey has shown, are important concerns for investors.'
The survey, conducted by IFI Research for Northern Trust's Global Fund Services business, is believed to be the first truly pan-European study to explore the effects that the changing investor profile and increased institutional asset flows are having on the European hedge funds industry. Respondents included single strategy hedge fund managers, fund of hedge funds managers and institutional investors who, collectively, either invest or manage in excess of €106 billion (US$132 billion) in hedge fund assets. This represents approximately 40% of the European hedge fund market.
The survey also revealed that 80% of all respondents think that the increased participation of institutional investors in hedge funds will bring additional regulatory burdens on, and require more standardisation from, those managing the assets. Almost half (46%) of all those surveyed said that they would welcome an increase in regulatory supervision. Institutional investors, their advisers and fund of hedge funds managers targeting the institutional market, were most in favour of more regulation. Furthermore, approximately three quarters (76%) of firms interviewed which target the institutional market said they have already embraced or are embracing a high level of standardisation, but much more needs to be done in terms of common asset identifiers, reporting frequency, accounting treatments, pricing and fees. By contrast, 32% of all those surveyed proclaimed themselves against further regulation and standardisation, and this group corresponded predominantly to single strategy hedge fund managers and fund of funds serving high net worth investors.
'These results point to a division emerging between those managers with a business model firmly founded on serving the private wealth sector, and those focused on the institutional market. Those managers who have already developed an infrastructure to support the institutional market place have a head start in serving that investor type. Other managers will be equally at home developing products specifically for the wealth market - the traditional home of hedge funds. I believe it's a logical evolution,' said Russell-Jones.
The full report can be downloaded here
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