What Investors Want

What Investors Want From Hedge Funds Today

As much as hedge funds want to move on from the last 12-18 months, investors may not be so willing to forget and forgive. Some managers may believe that with returns back at respectable levels in the first half of 2009 the recession is over and investors will be as eager as they once were to invest in hedge funds. Standard & Poor's Ratings Services suggests that potential and current limited partners will be reluctant to return unless hedge funds meet some high expectations such as greater transparency and communication with investors, lower leverage, and higher liquidity.

Investors and many hedge funds agree on the benefit and need for greater transparency and communication with investors, but those reluctant funds may see a dip in investors if they do not open up to their limited partners:

Many funds have realized that the benefits of being transparent outweigh the potential cost from the outset, enhancing investor goodwill. After all, during times of uncertainty, such as the recent financial crisis, investors' focus seems to shift to return of capital from return on capital...Investors will likely increasingly judge a hedge fund based on the transparency of its dealings with all its business partners.

S&P Rating Services also highlights that investors are looking for less leverage after the credit crisis and the fall of highly-leveraged investment banks like Lehman Brothers. Additionally, this may draw attention from regulators looking to ensure that financial institutions are not too leveraged that they pose a "systemic risk."

Most rated hedge funds with a 10-plus year history have generally understood that they can succeed or fail by leverage -- borrowings or embedded leverage in instruments that can magnify both gains and losses -- and have accordingly used it sparingly. Some funds have come to shun the use of leverage altogether because of its inherent risk.

In general, we believe investors will be more attracted to hedge funds that use low to modest balance-sheet leverage relative to their investment strategy in conjunction with a strong risk management system, which should enable them to respond to market changes more promptly. source

A consistent push by investors has been for greater liquidity after some hedge funds collapsed in the credit crisis because they had such a high concentration of illiquid positions in their portfolios. Furthermore hedge funds that simplify their operations--by reducing staff, number of strategies implemented and a greater focus on the core elements of the hedge fund's strategy-- may be more attractive to investors. With a refocus by hedge funds on the strategy that made consistent returns S&P Rating Services believes that hedge funds will regain investor trust and win big in this volatile market.

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Tags: hedge funds, hedge fund returns, hedge funds 2009, industry volatility, investor confidence, growing capital, hedge funds investor relations, hedge fund investors, limited partners

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