Hedge Funds assets dwindle considerably Wednesday, January 21, 2009
For the industry as a whole, [albeit starting from a lower estimate than I've seen elsewhere, which may reflect that their figures do not include assets invested in fund of hedge funds] Hennessee Group has estimated that hedge fund industry assets decreased by USD782bn in 2008 to USD1.21trn, a 39% fall. They divide this up as
- USD399bn redemptions
- USD383bn drop in valuation
This is because the Madoff case has challenged the notion that the due diligence and monitoring is in any way adequate to warrant their fees. Furthermore, investors notice fees far more when performance is low or negative and will question the value added far more.
Hennessee Group Research says, fund of hedge funds were the largest single source of capital for hedge funds at 32 per cent of the total. Of direct investors in hedge funds, individuals and family offices accounted for 30 per cent, pension schemes 15 per cent, endowments and foundations 12 per cent and corporations 11 per cent.
The hit on fund of hedge funds will affect smaller and less well known funds hardest, since they tend to be weakest at marketing successfully to end investors. Whilst they may get seed money from some wealthy investors to put them in the barely viable $100m range, pushing beyond this without fund of hedge funds assistance is incredibly tough.
One firm in particular, RAB Capital, is having a bad time [not to mention investors in the company and its' funds]. Previously acclaimed, its assets under management fell 74% in 2008 to $1.9 billion at the end of December, compared to $7.2 billion a year earlier, according to Market Watch. As a result, revenues including management and performance fees fell to £51m, a drop of 59%.
Across the industry, there is also an investor backlash from hedge funds that have imposed a "gate" on investments i.e. refused to allow investors to make withdrawals, whilst still demanding their management fees on those same funds. This has been likened to being locked in a hotel room by staff and still being told you have to pay the room rate. In the good times, few investors seemed to care about their liquidity options on such investments. Now it has moved to the forefront of their mind and I anticipate more investors will demand considerably lower fees to lock their money up for long periods.
I confess to some bitterness on this matter of investor liquidity - I was involved in a venture that sought to develop a regulated secondary market for hedge funds that would enable investors to trade with each other, without necessitating redemptions from the funds. Many fund of funds firms we spoke to back in 2007 scoffed at the notion that such a mechanism was useful since "redemptions and liquidity would never be an issue" which is a genuine quote to me from the CIO at GAM. I am hoping to run into him again soon to remind him of those words.
Many hedge funds will also be quietly dying or considering exiting since the likelihood of them receiving performance fees for some years to come looks remote, given that they normally have to hit the high watermarks of past years before they qualify. Of course, management fees may tied them over, but drops in the value of assets will have also pushed these down.
If 2008 was bad for funds, my current guess is that 2009 will not be any better.