Investors seem to be losing confidence in their advisers, the consiglieres who whisper into their ears about whether to put money into hedge funds. A report by Chicago-based market research firm Spectrem Group confirms this suspicion, which only adds to industry woes — hedge funds are taking more flak than ever from investors who expect absolute returns, lousy markets or not.
“The perception [of hedge funds] is really bad,” concedes Brian Kazanchy, chairman of the investment committee at RegentAtlantic Capital, a Morristown, New Jersey–based consulting firm advising 800 clients with a total of $1.4 billion in assets. “Lack of regulation and transparency are concerns.”
A Spectrem survey in November of 750 households with more than $1 million in assets each, found that the approval rating for investment advisers was 40 percent, down from 60 percent in the spring. Only 9 percent said they would boost their hedge fund allocation in the future. By contrast, 49 percent said they would more likely add to cash holdings. “When we talk to consumers about hedge funds, they look at them as risky,” says Tom Wynn, a director at Spectrem.
RegentAtlantic used to direct about 10 percent of most investors’ assets into hedge funds. In September it switched that entire allocation into mutual funds like Absolute Strategies and JPMorgan Chase & Co.’s Highbridge Statistical Market Neutral Fund that use options and other hedging techniques while minimizing leverage.
Indeed, hedge funds face “unprecedented reputational, operational and cost challenges as they head into 2009,” according to a January white paper by Paladyne Systems, a New York–based hedge fund technology provider. It predicts a shift in the way firms manage their operations in the face of client redemptions and lower fees. Rather than build staff and technology in-house, Paladyne says funds will outsource such services as intraday reporting and administration.
At least one big player is already moving in that direction. New York–based Millennium Management, which oversees $13 billion worth of assets, recently hired an independent administrator, GlobeOp Financial Services, for its three hedge funds. “We are sending a strong signal about our commitment to transparency and independent valuation,” says Terry Feeney, co-president and chief operating officer of Millennium.
