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Hedge Fund Investors Post-Crisis

Hedge Fund Investors Post-Crisis

Investors Reject Funds that Mistreated Them During Crisis

Hedge fund investors are like any other consumer: they like to be catered to and remember when they are treated poorly.  So, it should be little surprise that while investors are returning to the hedge fund industry, they are avoiding hedge funds that they feel mistreated them in the financial crisis.

As reported yesterday, a recent survey by Deutsche Bank found that investors are flocking back to hedge funds and may contribute as much as $222 billion in 2010.  However, 80% of investors said that they will avoid those funds which froze their assets, enforced long lock-up periods or created side-pockets.  This should be a good lesson to managers on the costs of such methods in the long-term.
According to the survey, $100 billion to $222 billion could flow into hedge funds this year. That would push sagging hedge fund assets back to former highs at $1.72 trillion, the report says.
Not all funds will get a piece of the action, however. Investors plan to shun those that locked up their money, froze assets or added so-called sidepockets, where bad assets go to die a slow death.
According to the report, 80 percent of investors will refuse to invest in funds that participated in “freezing or suspending of assets and increasing side pockets by managers.” Freezing of assets was voted as “the most damaging action to a fund’s reputation,” according to 38 percent of the respondents – a crime worse than bad performance, which only took 20 percent of the votes.
Of course, hedge funds are also fighting the stigma by offering better terms to newcomers. Silver Point, a credit/distressed fund launched by two former Goldman Sachs partners, created side pockets for existing illiquid holdings and told new investors they get to participate in a more liquid portfolio with annual rolling liquidity. Source


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