Kicking off GAIM Ops Cayman 2016 was the Town Hall debate, featuring perspectives from both investors and managers. The discussion took place against a backdrop of a challenging past 18-months for the industry, with a real sense that returns are lower, barriers to entry are higher and exits have become easier. As a result, some of the biggest names are stepping back from hedge funds or looking to start family offices instead.
The hedge fund industry can be seen to some extent a victim of its own success, as ten years of sustained growth has been followed by a period of more modest flows. That doesn’t, however, take into account that hedge funds make up just a part of the overall alternatives industry.
One view is that the issue isn’t rising or falling asset levels, but as asset allocation becomes more sophisticated, the will of the investor carries more influence. It does appear, however, that every time there is a scandal, the industry comes under stress and is punished, as with Madoff for example.
Greater power for investors has placed investment managers under pressure and as the business has matured, we have seen fees come down and moves towards transparency increase, while uneven performance has allowed bigger investors to gain even more power. At the same time, rising operational and compliance costs have made certain issues harder to deal with, alongside greater complexity on the investment side.
Prompting a massive change of awareness has been the maturity in demand among investors and allocators. Changes in transparency have meant more customised reporting and more detailed pre-meeting questionnaires. One thing the panel agreed on was that this situation wasn’t likely to reverse. Pressure on fees has been maintained and 2/20 wasn’t always appropriate, they said, with more customised vehicles and investor friendly mechanisms. The view consensus was that transparency is all well and good, but don’t ask for it if you are not ready for it.
More live audience polling identified sourcing investments, managing operational costs and uncertainties in the regulatory environment as the greatest challenges for managers in today’s markets. Global regulatory obligations are clearly growing. Most generally agreed that change was needed and the industry would have to adapt if people were to keep their jobs.
While most agreed that regulatory changes were the right thing to do, the key point is there needs to be a level playing field. It’s not just the regulation but the practical application and enforcement that is the issue, so balance is important.