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Four out of every five of the investors interviewed in June 2016 expressed disappointment with hedge funds for
failing to meet their return expectations over the past 12 months.
Significant numbers of investors, approximately 39% of those Preqin surveyed, plan to reduce the amount of
capital they have invested in hedge funds over the next 12 months.
Less than half this figure (18%) plan to increase their exposure.
Fig. 3.8: Reasons Why Investors Have Become More Negative
about the Hedge Fund Industry in the Past 12 Months
Portfolio Has Not
Met Expectations
61%
34%
High Fees
Not Reduced
Portfolio Risk
13%
Not Offering
Downside Protection
13%
Negative Press
about Industry
8%
Not Reduced
Portfolio Volatility
8%
11%
Other
0%
10%
20%
30%
40%
Proportion of Respondents
50%
60%
70%
Source: Preqin
DIANE HARRISON
BLEAK HOUSE (OR THE OUTLOOK ON HEDGE FUNDS NOW)
Hedge fund managers are feeling the impact of this gloomy outlook, and as 2016 winds down, remain concerned
with what implications these views might mean for fund allocations next year.
However, there were some glimmers of hope also captured in this survey data. As global market struggles continue
to foster uncertainty among investors, a good chunk (47%), still believe that hedge funds can navigate this type of
market climate successfully, and 18% are believers in the downside protection and volatility mitigation benefits
these funds can offer.
Fig. 3.7: Reasons Why Investors Have Become More Positive
about the Hedge Fund Industry in the Past 12 Months
47%
18%
12%
6%
6%
0%
6%
Other
0%
5%
10%
15%
20%
25%
30%
35%
Proportion of Respondents
40%
45%
50%
Source: Preqin
Managers who outperformed their benchmarks during this period would be wise to present their experiences to
prospects seeking conviction that there are still strategies that can perform to expectations and deliver while
equities and fixed income arent. One way to articulate this is through a case study narrative that walks the investor
though what the hedge fund manager actually did in the difficult market period in which they outperformed. Why
was the investment initiated, how was it managed, and when was it exited and with what end result?
LOWER FEES, PLEASE
Surveyed investors were also able to recognize some improvements that the hedge fund industry has made over the
past year, notably in the general category of fees charged. Significant strides were made in the level of management
fees charged, and how these fees are communicated. Regarding the charging of management fees, almost two
thirds of the respondents felt that movement in the right direction was made, while the majority wants to see even
more of this effort in 2017.
Also interesting to note in chart 3.11 is the rising level of investor interest in applying a hurdle rate to fund terms,
with 57% of respondents desiring to see some form of hurdle applied to fund performance fee calculations. Hedge
fund managers might want to take a close look at how they have described their fees, both management and
performance. They also should ensure that their documentation and marketing efforts articulate how these fees
support the business operations and infrastructure as well as the alignment of interests with limited partners.
DIANE HARRISON
BLEAK HOUSE (OR THE OUTLOOK ON HEDGE FUNDS NOW)
Fig. 3.11: Areas of Fund Terms Investors Feel Have Shown the
Most Improvement over the Past 12 Months and that
Need to Improve Further in the Next 12 Months
Proportion of Respondents
80%
70%
73%
63%
60%
56%
54%
60%
57%
Areas that Have Improved
in Past 12 Months
50%
40%
32%
37%
29%
32%
30%
27%
15%
20%
22%
15%
10%
Manager Commitment to Fund
Hurdle Rate
Lock-up Period
Management Fees
0%
4%
24%
Positive
Neutral
Negative
71%
Source: Preqin
There are many factors that play into this affirmative state of mind, most notably that private equity investors believe
their investments have met or exceeded return expectations over the past 12 months, and the majority of these
investors plan to increase or hold steady their allocation to private equity going forward into 2017.
This mindset will factor heavily on the future ability of hedge fund managers to sway investors to shift allocations to
hedge funds from other alternative options such as private equity. Its a hurdle to overcome, to be sure, but also
reinforces the need for each hedge fund manager to clearly make the case to investors for commitment to their
strategy and why. Managers wanting to grow or even hold steady on AUM in 2017 might plan to take a hard look at
PANEGYRIC MARKETING | OCTOBER 2016
DIANE HARRISON
BLEAK HOUSE (OR THE OUTLOOK ON HEDGE FUNDS NOW)
their marketing and sales materials and processes to determine if they are answering the straightforward questions
that investors need to have satisfied
What am I offering?
Why is this beneficial to investors?
How does it differ in a positive way from other investments?
Are my terms attractive and competitive?
Does the future market environment hold promise for this type of investment?