Engineer says: "Investors clearly prefer greater use of equity in both the management company and funds, accompanied by deferrals and clawbacks. Managers may need to do a better job aligning their compensation arrangements with the objectives of their investors."
Selection criteria and redemptions Performance will always be a key consideration for investors when selecting a fund manager, but it is not necessarily a barrier to investing. Hedge fund managers believe that historic long- and short-term performances are two of the top criteria that investors use to select a manager. However, the survey results show that investors identify the investment team (82%), risk management (70%) and investment philosophy (66%) as the three most important initial screening criteria. This suggests that during initial selection, confidence that managers can generate strong future returns is more important to investors than actual past performance.
Managers overwhelmingly (86%) cite performance as the primary reason for redemptions, but while investors (86%) also see this as important, they are almost equally inclined (84%) to take their assets elsewhere when there are changes in key personnel. This shows that the industry remains, emphatically, a "people" business.
Tully says: "Turnover is a communication issue for funds. Managers that communicate openly and honestly with investors about changes in the team and performance issues may give investors the confidence they need about their future returns to keep them from pulling out of the fund."Capital investments, fees and expenses To support asset growth and expansion of new strategies, nearly two in three hedge funds have either added headcount in the front office or expect to in the near future. A number of hedge fund managers say hiring has been opportunistic, particularly given the upheaval at banks. Additionally, almost 45% of hedge funds are adding headcount in support functions – middle-office, back-office, risk management and legal/compliance – to support expected growth, client demands for transparency and increased regulatory requirements. Moreover, over half of managers are making technology investments in risk management, compliance, and investment management systems. Investors generally agree with these outlays. Two-thirds of investors say that their managers need to invest in risk management technology, and nearly 60% say their managers need to spend on investment management systems.