Preferred Hedge Fund Terms
Investors Gaining Preferred Hedge Fund TermsHedge funds suffered heavy losses and redemptions during the worst of recession and now, as the hedge fund industry is recovering, investors are finding managers more flexible. Institutional investors have succeeded in persuading major hedge fund managers to establish new funds, share classes or more reasonably-priced offerings. The consenting hedge fund managers include Renaissance Technologies Corp., Citadel Investment Group and Diamondback Capital Management.
Renaissance Technologies Corporation will create a hedge fund exclusively for institutional investors in the next 2-3 months, according to an executive with Renaissance's institutional subsidiary. Chicago-based Citadel Investment Group will create a family of single-strategy hedge funds with lower management fees than its flagship funds. Diamondback Capital Management, along with other hedge funds, recently agreed to lower fees by providing a share class that gives investors a smaller fee for a longer lockup period. All of these decisions are the result of a push back by institutional investor toward better terms and lower fees. Several hedge funds, desperate for capital during the last year, have agreed but it's possible that the status quo will return if hedge funds continue to perform well.
This is definitely a change from the hay day for hedge funds when investors were much less concerned about the terms of the agreement, rather many institutional investors were simply pleased to have access to exclusive hedge funds. Jane Buchan, CEO of hedge fund-of-funds manager sees this change, “Everybody is thinking about terms these days, where they definitely weren't before. We've found it much easier to negotiate lower fees, transparency and the type of investment vehicle.”
There is some disagreement about the value of different share classes. While instutional investors are often drawn to "institutional-only" funds, hedge funds often disregard the label and allow other investors in as well. Under the varying share classes, hedge funds are often able to negotiate better terms because of the exclusivity of the fund. Thus they can demand longer lock-up periods and larger minimum investments but may also add non-institutional investors. Yet this is a distinct change in manager-investor relations as hedge fund GP's are more willing to negotiate with limited partners.
“The difference now is that hedge fund managers are willing to sit down and talk about all of this, which wasn't the case a couple of years ago,” said a managing director at an equity hedge fund manager, who asked not to be identified.
Still, some believe the changes are largely cosmetic, repackaging existing share classes as “institutional” to make them more attractive to pension funds, endowments and foundations.
When it comes to comparing institutional vs. non-institutional hedge fund share classes “it's really about the sizzle vs. the steak,” said William Crerend, president and CEO of hedge funds-of-funds manager EACM Advisors LLC, Norwalk, Conn. “You need to get under the hood of these vehicles and see whether you really come out better given the terms of the investment,” Mr. Crerend said.
Mr. Crerend also said “there likely will be a spectrum of outcomes” when it comes to the ways that hedge funds satisfy institutional investor needs, ranging from separately managed accounts to single client funds, institutional feeder funds for flagship strategies and institutional share classes. Source
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