GLOBAL - Institutional investors including pension funds are fighting back against being unexpectedly locked into their hedge fund investments, according to a global survey of them by Credit Suisse.
They are also increasingly focused on hedge funds' redemption terms, and whether they will pay the standard 2% and 20% charges requested by hedge funds for all of a portfolio's returns.
Credit Suisse's survey of investors with a combined US$1trn under management found about 45% of them have specifically requested the removal of obligatory side pocketing of assets by hedge fund managers, in favour of optional side pocketing.
Some investors during the crisis expressed unease, if not outright anger, at the unexpected side pocketing of assets - effectively the isolating of assets in hedge funds from pricing and from forced sale.
Edgar Senior, managing director and head of capital services at Credit Suisse in London, said almost half the investors surveyed have pushed managers to abandon it, in favour of optional side pocketing.
This latter arrangement allows investors to decide whether they would invest in a share class that could be subject to side pocketing of assets, or in one where assets would not be pocketed, or to have decisions on side pocketing made on a trade by trade basis.
Side pocketing effectively froze pension funds' ability to redeem fully from many hedge funds, and some estimates suggest 10% of industry assets remain impaired.
Credit Suisse's study also found institutional investors are now fighting to match the conditions of withdrawing from funds with how quickly the liquidity of underlying markets allows the managers to facilitate this.
Senior said: "What investors have really pushed for since the big restructurings in 2008 is forcing managers to tie together the redemption terms more closely with assets' liquidity."
Credit Suisse's report found 43% of investors have already demanded an increase in how often they can withdraw their money, and 39% have asked for the removal of hard lock-ups for new investors.
Only 25% of investors in more liquid strategies - which typically include global macro and commodities trading advisers - are now open to investing in funds with a 90-day notice period, whereas 72% accept such a notice period for funds investing in less liquid markets.
Senior said: "We believe that [the results of our global surveys] establish a shift towards a more sustainable model where managers and investors have a deeper understanding of each others' goals and perspectives, and negotiate appropriate terms and structures for mutual benefit."
Credit Suisse's survey found, when investors lock their money into funds, about 66% of them believe they deserve, in return, a reduction in the full levies hedge funds charge. About the same proportion of managers agree with this.
Irina Thesleff, who covers European pension fund investors for their hedge fund allocations at Credit Suisse, said Nordic schemes were particularly keen in separating what proportion of a hedge fund's total return came from alpha, and what from beta - and then pay hedge fund fees only on the ‘alpha portion'.
Credit Suisse's Senior said: "Pension funds are not being dictatorial, they are trying to find something that makes sense. [Pension funds are saying to managers], ‘if you are structurally long beta, then the fee structure needs to change'."
Senior added one solution for these hedge funds is the use of a benchmark hurdle the fund must reach before charging its fees.
Thesleff said relatively few hedge funds already had hurdle rates attached to fee schedules - with a couple of large multi-strategy funds as notable exceptions.
She added Nordic funds generally had a keener focus on what they paid hedge funds, and concentrated more on achieving their own target return from hedge fund allocations.
She said European pension funds in general sought out more established hedge fund names with longer track records, whereas their US counterparts were often more amenable to investing in niche or younger funds.
Overall, the hedge fund industry will hold $2trn by year's end, 20% more than it did at the start of the year, Credit Suisse's survey found.
Respondents said they planned to grow their existing hedge fund investments, on average, by 9%, or $148bn across the industry. Investment gains of 11% will account for the rest of the growth, they said.
The bank's report also found two thirds of investors planned to build on their allocations to funds pursuing the global macro strategy.
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