Many large Super Funds are holding hedge funds more accountable on a number of fronts - most notably on costs. When it comes to how incentive fees get paid, more investors want hard hurdles to be reached over longer periods before giving up a taste of the upside. Further, regulatory pressure such as the Stronger Super reform is compelling Super Funds to gather information on the underlying composition of their investments.
US Pension Plans holding a hard line
The situation in the US, where pension plan sponsors are holding a harder line on transparency, provides some insight into what local Funds can expect.
Three years ago, a steering committee of hedge funds along with some investors and a specialist hedge fund consultant Albourne attempted to set up a set of shared protocols for reporting risk exposures. While a large percentage of large funds still refuse to turn over much information not least of which being position-level data, the Albourne-led "Open Protocol" effort did begin the process of encouraging hedge fund managers to share more information.
In a still unfolding era of post-Global Financial Crisis hand wringing and heightened risk management, information regarding the weighting towards securities, strategies, asset types and sectors is a specific area of interest so investors can begin to roll it all up and get a useful handle on where they may be overexposed.
At least one U.S. pension fund specifically demands a set of agreed transparency requirements at the stage of contract negotiations, so no manager is hired unless they agree to subject themselves to regular and rigorous sharing of data, as well as periodic on site operational due diligence visits performed by an outside provider.
Lock-Up terms being revisited
In addition to the need for increased transparency, lock up terms are also being rethought on a case by case basis. As one industry observer in the US put it: "The hedge fund industry is also being forced to justify mismatches between term structure and investment strategy. For example, if you are doing merger arbitrage, why should I consent to a 6 month lock-up? Is there an investment/operational justification, or are you simply flexing your negotiation muscles?"
Some investors, whilst content to have their assets locked up, want to ensure that the lock up period is consistent with the time horizon of the investment strategy and that they are co-mingled with similarly minded investors. For instance, investors with a true long term horizon do not wish to be lumped in a vehicle with investors of unlike mind and thus may ask that a separate "fund of one" be created to eliminate the chance of being commingled with impatient money.
Bottom line for Hedge Funds: Investors are still interested but they are going to put you through your paces, get fees as low as possible and take a keen interest in what you are really up to beyond twice annual sit downs.
John DiBiase, Director