Troubled by Hedge Fund Fees, Performance and Transparency

Stockholm (HedgeNordic) – The new Q2 2016 NEPC Endowment and Foundation Poll has revealed that some hedge funds and endowments are re-evaluating their allocations to hedge funds following concerns about high fees, underperformance and transparency.

The survey, which is a measure of endowment and foundation confidence and sentiment related to the economy, investing and market performance, also includes a special focus on how endowments and foundations view hedge funds, and has shown troubling findings in its most recent iteration.

“While hedge funds play an important role in many institutional portfolios, the last several years have been difficult for the industry and investors are starting to look very closely at how hedge funds can work for them. These survey results are by no means indicating a mass exodus from hedge funds, but they do point to greater pressure being felt in the industry as a whole,” Cathy Konicki, partner and head of NEPC’s endowment and foundation practice group, was quoted by HedgeWeek.com as saying.

The survey showed 24% of respondents cited having zero exposure to hedge funds, a significant increase from the Q2 2014 NEPC Endowment and Foundation Poll which showed only 2% of respondents with no exposure to hedge funds. This finding paralleled a drop of 23% of respondents allocating 11-20% of their portfolio towards hedge funds in Q2 2016, by comparison to 39% of allocations in the same bracket for Q2 2014.

Endowments and foundations cited hedge fund fees as a serious concern, with 25% of respondents having asked for or having been offered reduced fees by hedge fund managers within the past 6 months. High fees were cited as the second largest challenge faced by hedge fund investments at the time of publication (54%), surpassed only by disappointing returns (80%) and trailed by transparency (37%).

On the positive side, 55% of endowments and foundations responded they are not actively discussing reducing their allocation to hedge funds, despite 28% reporting such considerations. Nearly a fifth of respondents (17%) have either increased or are considering increasing their allocations.

“This survey tells us that endowments and foundations are frustrated with hedge funds but they’re not giving up on them, and with several global concerns on the horizon, many investors may be looking towards hedge funds to protect their portfolios,” said Ms. Konicki.

Indeed, the survey also revealed bullish sentiments for a number of strategies, with 36% of respondents projecting multi-strategy hedge funds to generate the highest returns over the next 3-5 years, 33% expecting the same from long/short equity, and 25% and 22% for global macro and credit respectively.

Picture: (c) Drazen – shutterstock