High Fees, Longer Lock-Ups Top Hedge Fund Beefs

[Scorpion Man]

High Fees, Longer Lock-Ups Top Hedge Fund Beefs
11/15/06
DailyII.com


Hedge fund fees came in for some heavy criticism at the Global Alternative Investment Management conference, with the bottom line being, they?re not worth the fees. ?The real problem,? said Alice Handy, founder and president of Investure, ?is a proliferation of hedge funds getting paid outrageous amounts of money to produce mediocre returns.? We?ve heard that before. But, she added, ?The key to success is to have the (hedge fund) manager articulate a strategy that you understand...If you do not (see) these things, then you should not have them in your portfolio.? Wise words, perhaps, but meanwhile the inflows just keep on coming, especially from institutional investors desperate for better returns ? even though they?re not currently finding them in hedge funds. In the past two years, in fact, annual returns on average have trailed some stock indices. ?Going forward, the average return, on a risk adjusted basis,? Chief Investment Officer Larry Kochard of Georgetown University Endowment said in an aside to Reuters, ?is not going to be attractive. It is going to be a challenge? for the hedge fund industry in general ? especially with the ?rapid turnover of investment managers eager to beat their competitors and gather fresh assets,? according to the news service.


Another problem facing hedge fund investors are the increasingly longer lockups, affectionately called ?duration creep,? whereby HF managers are convincing their clients of the advantage to keep their money for an extended period. The issue puts hedgies at odds with their investors, who want a shorter commitment so they don?t get burned by an investment gone bad. On the one hand, hedge fund managers contend that longer lock-ups give them a better chance of producing healthier returns. ?On the issue of lockups,? Tom Zucosky, CIO at Discover Capital Family Office, ?get used to it. Better returns are made from illiquid investments. On the other hand, hedge funds should find a way of protecting their committed investors. ?If you run into a more difficult cycle, you want to be sure that those remaining in a fund do not get punished.?