Investor pressure to continue for hedge fund industry

Offshore law firm Walkers expects significant activity in the hedge funds market for 2013 as large investors return to the market. Factors that could weaken the generally positive outlook are regulatory and compliance requirements such as AIFMD and FATCA, which will increase the cost of doing business.

Walkers sees a continuation of a trend of 2012 when large single investors gained increased leverage in the global hedge funds industry, putting pressure on fees and demanding more transparency and more flexible terms. As a result, capital supply to the industry “has typically come with strings attached”.

In a hedge funds outlook for 2013 Walkers expects single investors to maintain the strong negotiation power. “While this is not a new trend, it will likely continue to accelerate in 2013. Investors will focus on pricing, transparency, and liquidity, including an increased ability to withdraw capital on demand and get it back in cash,” Walkers said.

The law firm noted that data from Cayman Islands Monetary Authority-regulated funds set up by Walkers indicates a demand for enhanced liquidity as monthly liquidity provisions increased from 35 per cent of funds in 2011 to 53 per cent of funds in 2012. Correspondingly, the share of funds with quarterly liquidity provisions fell from 55 per cent to 31 per cent.

At the same time, lock-up provisions, which restrict investor access to funds for a prescribed period of time, have become less common. A majority of 71 per cent of funds had no lock-up provisions at all.

The data from Walkers clients also shows a trend toward the use of independent directors, with 72 per cent of all new funds featured independent directors, up from 64 per cent in 2011.

Given the uncertainty in Europe and the Middle East, some investors will be inclined to avoid the perceived challenges in the two regions and instead focus on opportunities in emerging markets. But with credit being tighter overall, many managers will seek to take advantage of the volatility in the European Union, seeing greater potential for returns, according to the law firm.

In Asia, Hong Kong has seen an influx of large global hedge fund players during the recent past. Smaller hedge funds, in turn, struggled to raise new capital amid a “flight to quality” by investors, high barriers to entry and poor performance in difficult trading conditions, Walkers noted.

Japan was one of the better performing markets in Asia, whereas China experienced the adverse effects of the real estate bubble. Investors looking for opportunities in Asia will tend to invest with fund managers who have demonstrated the ability to limit high market volatility, Walkers predicted.

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