Maturity creating market confidence, says Ernst & Young report
TORONTO, Oct. 17 /CNW/ - The world's leading hedge funds managers are
more concerned about attracting and retaining talented people and managing
growth than anything else, according to new research - Navigating New
Complexities - published today by Ernst & Young.
"Governance and infrastructure are the top enablers for hedge fund
growth, as the industry continues to mature and develop," said Leon Chin,
partner in the Ernst & Young Toronto hedge funds practice. "For Canadian hedge
fund managers, this research explores key global industry issues that affect
them. This is their guide to help them benchmark their priorities against a
global peer group. Most importantly, this is the tool to help local Canadian
hedge fund managers become more successful in the global economy."
The poll of over 100 top global hedge funds (and fund of funds) managers,
collectively managing some US$900 billion in assets, shows that retaining the
right people (42%) and managing growth (39%) are the highest level challenges
over the next year, compared to just 9% who anticipate investing or developing
in new products. Respondents were principals, chief operating officers and
chief financial officers at these funds.
Art Tully, co-leader of the global hedge funds practice at Ernst & Young,
said: "The global hedge fund industry now manages US$2.5 trillion of assets;
US$41.1 billion poured in from investors in the second quarter of 2007 alone.
The industry appears to be proving that it can handle such inflows. The
ability to absorb such flows is only tested by the capacity to grow and retain
"Our survey demonstrates that managers are rethinking their
infrastructure and operations to cope, not only to ensure scalability but,
more importantly, to minimize any drag on performance. This is an evolutionary
development for funds. To this extent we agree with industry commentators who
say that funds are moving from institutionalization to 'industrialization',
morphing into more typical asset manager-type structures."
Thirty-seven percent of respondents are confident that their operations
meet the needs of their investor base and don't see a need to change in the
next two years. In addition, 21% say that they are likely to be able to offer
products suitable for retail investors in the next two years, demonstrating a
new confidence for the industry.
Only 13% of respondents expect to raise permanent capital in the next two
years. The most popular route is deemed to be a partial sale to an external
owner; and the greatest interest in raising permanent capital comes, perhaps
surprisingly, from managers in the Far East.
David Sung of Ernst & Young's Hong Kong office said: "Given that the
managers in the Far East have yet to experience the maturity of businesses in
the US and Europe, the idea of having more permanent capital could be
appealing as a faster means of stabilizing their asset base."
The challenge of greater transparency and managing operational risk
Greater transparency around the valuation process is the foremost
medium-to-high level regulatory challenge for 64% of respondents in the next
two years; conflicts of interest (57%) and market abuse (55%) are the next key
concerns. Valuation and pricing risks were also deemed the second greatest
operational risk for managers.
Mike Serota, co-leader of the global hedge funds practice at Ernst &
Young, said: "Greater emphasis is being placed on a consistent approach to
pricing and reporting of portfolios. While credit market dislocation may lead
to short-term reactions and calls for greater transparency from the sector,
there is a marked longer-term trend in awareness of the importance of
comparable valuation approaches."
People issues were regarded as both a cause of, and the primary solution,
to operational risk: 18% of respondents identified people as the main
operational risk, but 34% said hiring the right people was key to mitigating
Three quarters of respondents identified technology as the biggest
spending area in the next two years: for 58% of funds, expenditure on risk
management systems was anticipated to be the biggest proportion of that spend.
Incentive and management fees set to fall
The survey shows that the majority of funds (80%) expect incentive fees
and management fees to decrease in the next two years. Almost two-thirds also
identified increased operational costs as a significant future pressure on
fees over the same period.
According to Julian Young of Ernst & Young's UK hedge funds practice this
is not as big a concern as it first appears: "Although pressures on fees may
be downward, managers that consistently perform well - both on an absolute and
relative basis - will also be able to continue to charge the fee structure
they want. The poorer performers will be affected the most."
Two-thirds of respondents expect their investor lock-in period to
decrease in the near future; just a fifth anticipate an increase.
Salary and culture attracting the best people
Hedge funds are working just as hard as other financial institutions to
ensure they attract and retain the right people. Salary packages (86%) and
firm culture (83%) are the main attractions enticing the best staff to join.
Art Tully concluded: "The real concerns for managers, across most of the
regions interviewed, were with regards to retaining key personnel, such as
portfolio managers, senior researchers and senior operations staff, including
compliance and operational risk functions. Managers believe that compensation
packages are clearly the most important means of winning the war for talent."
About the survey
- The survey was carried out in partnership with Ipsos MORI, an
independent research company, across a number of leading global
hedge funds, and fund of funds managers.
- Interviews were conducted with principals and senior operational
executives, typically the chief operating officer and chief
financial officer, to understand their concerns and focus. The
thoughts of senior executives at over 100 of the top global hedge
funds are here in this report. The questions we asked were designed
to focus their minds on the drivers of change in the industry, in
particular their impact on process, technology, strategy and people.
- The managers surveyed for this research represented some US$900
billion in funds (approximately 55% of the entire industry).
- The global coverage of respondents included 59% headquartered in the
Americas; 26% in Europe; 14% in Asia Pacific and 1% other.
- The research was conducted between April and August 2007 via a 25
minute telephone interview with each interview split into 16
sections covering a broad range of industry topics.
About the global hedge fund practice
Ernst & Young is one of the pre-eminent professional services firm
serving the alternative asset management industry. We have teams around the
world, including North America, the UK, Cayman, Bermuda, Ireland, continental
Europe, Hong Kong and Australia, who are part of our global alternative asset
management practice. We are able to offer clients a seamless service around
the globe as they grow their businesses. We try to anticipate the fiscal,
regulatory, transactional, accounting and investor demands that the industry
faces, influence their direction where we are able, and give our clients
relevant, proactive advice.
About Ernst & Young
Ernst & Young, a global leader in professional services, is committed to
restoring the public's trust in professional services firms and in the quality
of financial reporting. Its 114,000 people in 140 countries pursue the highest
levels of integrity, quality, and professionalism in providing a range of
sophisticated services centered on our core competencies of auditing,
accounting, tax, and transactions. Further information about Ernst & Young and
its approach to a variety of business issues can be found at
www.ey.com/perspectives. Ernst & Young refers to the global organization of
member firms of Ernst & Young Global Limited, each of which is a separate
legal entity. Ernst & Young Global Limited does not provide services to
This press release has been issued by EYGM Limited, a member of the
global Ernst & Young organization.
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