Thu, 18/10/2007 - 07:45
The world's leading hedge funds managers are more concerned about attracting and retaining talented people and managing growth than anything else, according to new research - Navigating New Complexities - published by Ernst & Young.
The poll of over 100 top global hedge funds (and fund of funds) managers, collectively managing some US$900bn in assets (about 55 per cent of the entire industry), shows that retaining the right people (42 per cent) and managing growth (39 per cent) are the highest level challenges over the next year, compared to just nine per cent who anticipate investing or developing new products. Respondents were principals, chief operating officers and chief financial officers at these funds.
Art Tully, co-leader of the global hedge funds practice at Ernst & Young, says: 'The global hedge fund industry now manages USD2.5trn of assets; USD41.1bn poured in from investors in the second quarter of 2007 alone. The industry appears to be proving that it can handle such inflows. The ability to absorb such flows is only tested by the capacity to grow and retain talent.
'Our survey demonstrates that managers are rethinking their infrastructure and operations to cope, not only to ensure scalability but, more importantly, to minimize any drag on performance. This is an evolutionary development for funds
'To this extent we agree with industry commentators who say that funds are moving from institutionalization to 'industrialization', morphing into more typical asset manager-type structures.'
Thirty-seven per cent of respondents are confident that their operations meet the needs of their investors and don't see a need to change in the next two years. In addition, 21 per cent say that they are likely to be able to offer products suitable for retail investors in the next two years, demonstrating a new confidence for the industry.
Only 13 per cent of respondents expect to raise permanent capital in the next two years. The most popular route is deemed to be a partial sale to an external owner; and the greatest interest in raising permanent capital comes, perhaps surprisingly, from managers in the Far East.
David Sung, partner in Ernst & Young's Hong Kong office said: 'Given that the managers in the Far East have yet to experience the maturity of businesses in the US and Europe, the idea of having more permanent capital could be appealing as a faster means of stabilizing their asset base.'
Greater transparency around the valuation process is the foremost medium-to-high level regulatory challenge for 64 per cent of respondents in the next two years; conflicts of interest (57 per cent) and market abuse (55 per cent) are the next key concerns. Valuation and pricing risks were also deemed the second greatest operational risk for managers.
Mike Serota, co-leader of the global hedge funds practice at Ernst & Young, says: 'Greater emphasis is being placed on a consistent approach to pricing and reporting of portfolios. While credit market dislocation may lead to short-term reactions and calls for greater transparency from the sector, there is a marked longer-term trend in awareness of the importance of comparable valuation approaches.'
People issues were regarded as both a cause of, and the primary solution, to operational risk: 18 per cent of respondents identified people as the main operational risk, but 34 per cent said hiring the right people was key to mitigating that risk.
Three quarters of respondents identified technology as the biggest spending area in the next two years: for 58 per cent of funds, expenditure on risk management systems was anticipated to be the biggest proportion of that spend.
The survey shows that the majority of funds (80 per cent) expect incentive fees and management fees to decrease in the next two years. Almost two-thirds also identified increased operational costs as a significant future pressure on fees over the same period.
According to Julian Young, partner in Ernst & Young's UK hedge funds practice, this is not as big a concern as it first appears. He says, 'Although pressures on fees may be downward, managers that consistently perform well - both on an absolute and relative basis - will also be able to continue to charge the fee structure they want. The poorer performers will be affected the most.'
Two-thirds of respondents expect their investor lock-in period to decrease in the near future; just a fifth anticipate an increase.
Hedge funds are working just as hard as other financial institutions to ensure they attract and retain the right people. Salary packages (86 per cent) and firm culture (83 per cent) are the main attractions enticing the best staff to join.
Art Tully concludes: 'The real concerns for managers, across most of the regions interviewed, were about retaining key personnel, such as portfolio managers, senior researchers and senior operations staff, including compliance and operational risk functions. Managers believe that compensation packages are clearly the most important means of winning the war for talent.'
Copies of the survey will be available from www.ey.com/globalhedgefundsurvey
The survey was carried out in partnership with Ipsos MORI, an independent research company, across a number of leading global hedge funds, and fund of funds managers.
Interviews were conducted with principals and senior operational executives, typically the chief operating officer and chief financial officer, to understand their concerns and focus. The thoughts of senior executives at over 100 of the top global hedge funds are here in this report. The questions we asked were designed to focus their minds on the drivers of change in the industry, in particular their impact on process, technology, strategy and people.
The managers surveyed for this research represented some US$900 billion in funds (approximately 55 per cent of the entire industry).
The global coverage of respondents included 59 per cent headquartered in the Americas; 26 per cent in Europe; 14 per cent in Asia Pacific and 1 per cent other.
The research was conducted between April and August 2007 via a 25 minute telephone interview with each interview split into 16 sections covering a broad range of industry topics.
Ernst &Young is a professional services firm serving the alternative asset management industry, with teams around the world, including North America, the UK, Cayman, Bermuda, Ireland, continental Europe, Hong Kong and Australia, who are part of our global alternative asset management practice. We are able to offer clients a seamless service around the globe as they grow their businesses. We try to anticipate the fiscal, regulatory, transactional, accounting and investor demands that the industry faces, influence their direction where we are able, and give our clients relevant, proactive advice. Ernst & Young has 114,000 people in 140 countries.
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