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Hedge fund model faces re-evaluation, says Castle Hall Alternatives

Many aspects of the hedge fund operational model as it has existed over the past few years will have to be rethought in the wake of the industry's setbacks over the past year and a half, according to Castle Hall Alternatives, a Montreal-based provider of hedge fund operational due diligence.

'The credit crisis and market events over the past year have challenged the hedge fund industry as never before,' says Castle Hall's president and chief executive Chris Addy. 'Alternative investments will remain integral to diversified, institutional portfolios, but there will unavoidably be a re-evaluation of the hedge fund model.'

In a white paper entitled Hedge Fund Investing in a New World: Five Questions for Investors and Managers, Castle Hall singles out five aspects of the industry that are now set to be called into question, including whether the typical '2 and 20' fee structure is fundamentally flawed.

The white paper asks whether hedge funds need better corporate governance and whether there is an expectations gap in the fund administration industry, questions whether fund prospectuses should be written to protect the manager or the investor, and asks whether it is possible to hold illiquid assets in an open-ended vehicle.

'The structures and conventions accepted in the past may not be the best for the hedge fund industry going forward,' Addy says. 'We have highlighted a number of areas where current practices are weak.

'In the new world, we expect investors to be more vocal and require greater protection and control when allocating to hedge funds. Investors will also focus more intently on operational, structural and business issues in addition to performance and strategy.'

Castle Hall Alternatives helps investors identify hedge fund managers that not only deliver attractive performance but match operational best practices, using a proprietary methodology to prepare a detailed operational assessment for each fund under review.

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