NYHFR Survey: Members Expect Higher AUM, Lower Fees And Consolidation

Feb 27 2017 | 11:43pm ET

Institutional investors have been steadily re-evaluating their allocations to hedge funds amid persistent concerns about high fees, lackluster performance and questions about the value of actively managed investments. To see how the alternative investment community believes the hedge fund industry is poised to perform over the next few years, The New York Hedge Fund Roundtable (NYHFR) recently surveyed its membership about the topic.

Roundtable members generally believe AUM within the hedge fund industry will continue to grow, the survey revealed, although Roundtable members also believe additional consolidation within the industry will occur and fees will drop. 

Key findings of the survey:

  • Asked what they believe will happen to fees within the hedge fund industry over the next three years, 80% of respondents said they believe fees will be lowered to a 1 and 20 structure; 11% think fees will continue inching up above the industry’s current standard of 2 and 20; and 9% think fees will remain at 2 and 20.
  • Given the number of hedge fund firms that closed up shop in 2016, respondents were asked what they think the hedge fund landscape will look like in three years. 64% of respondents think there will be fewer hedge fund firms in business than there are now, while 36% think that there will be more hedge fund firms in business than there are today.
  • 71% of respondents think that assets under management within the hedge fund industry will be above $3 trillion three years from now, while 29% believe assets under management will fall below the $3 trillion mark.
  • When asked what they believe investor sentiment is towards active vs. passive investments, 66% of respondents think that, despite the fact that the majority of active manager underperformed last year, investors will stay the course and continue investing into actively managed investment such as hedge funds. 34% of respondents think that investors have lost confidence in actively managed investments and will begin moving more money into passive investments such as ETFs.
  • Asked if the new presidential administration is likely to achieve the trifecta of regulatory relief, tax cuts and fiscal spending in 2017, 51% of respondents think it will never happen, while 49% believe that the Trump administration will achieve its goal.
  • When asked to rank the United States, Europe, Japan and Emerging Markets in the order that they believe they will perform in 2017, 57% of respondents believe that the U.S. will perform best, 29% think Emerging Markets will do best, 8% think Europe will perform best and only 6% think that Japan will do best.
  • Conversely, 38% of respondents believe that the European market will be the worst performer in 2017, 33% think Japan will be worst and 29% think that Emerging Markets will be the weakest performers.

“The performance of hedge funds is being criticized by those who compare performance against index and long only investment products,” said Timothy Selby, chairman of the New York Hedge Fund Roundtable, in a statement. “Hedge funds, however, were never designed to compete with long-only products. As risk mitigation and capital preservation vehicles, their value is most realized when there are adverse market conditions. So in a way they can be compared to insurance. No one likes to pay for insurance, but when disaster hits, the insured consider their policies one of the best investments ever made.

“The death of active management has been greatly exaggerated,” added Mark Yusko, founder, CEO and CIO of Morgan Creek Capital Management. “Four times in my career hedge funds have ‘died,’ active management has died and value investing has died.” 

Yusko noted that the industry was first declared “dead” when it had $300 billion in assets under management, then again at the $600 billion mark, then at the $1.2 trillion mark and now at the $3 trillion mark. However, the shift toward passively managed investments bears watching, he said.

“Twenty years ago you couldn’t measure the percentage of passive money as a percent – it was sub-1%, but today it is 40%,” Yusko continued. “And the most egregious of it is this thing called smart beta, which is an oxymoron because it just doesn’t exist. Smart beta is great marketing, but it is not a real thing,” he said.

Of the respondents to this survey, 32% were fund managers, 14% were allocators, 8% were risk management or trading, 39% were service providers, and 7% were other industry participants.

The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers.

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