Hedge Fund Managers Say Government Regulation
Almost inevitable and most indicate that this may not be a bad thing
NEW YORK: As the Securities and Exchange Commission (SEC) continues
to investigate the practices of the hedge fund industry, hedge fund managers
not only anticipate more regulation, but believe more oversight may be beneficial
as the asset class continues to grow and attract public pension fund interest.
According to a recent study conducted by Broadgate Consultants, Inc., over
80% of the 65 respondents from U.S. hedge funds with up to $25 billion in assets
under management believe that the SEC is likely to enact regulations that will
provide SEC oversight over the industry, likely involving registration requirements.
While hedge fund lobbyists have been vigorously arguing against any form of
regulation, many hedge fund managers actually disagree, citing the money pouring
into the asset class, up from about $320 billion in the first quarter of 2000
to about $600 billion today.
Over half of the survey respondents say regulation is necessary, reflecting
the growing institutionalization of the industry and increasing demands for
greater transparency. According to experts who testified at the SEC hearings
on the industry held in May, about $175 billion of the approximately $600 billion
invested in hedge funds is attributable to institutions, up from about $53 billion
in 1998. The experts agree that this number is likely to grow even further.
For example, pension funds are increasingly investing in hedge funds or raising
their allocations – the Virginia Retirement System announced that it would
invest $1 billion in hedge funds over the next year and CalPERS plans to increase
its allocation from approximately 1% to about 4% of its $80 billion portfolio
over the next couple of years. Regulations requiring registration would likely
force hedge funds to disclose more information to investors concerning returns,
investment strategy and risks.
The survey findings also suggest that hedge fund managers are likely to remain
good brokerage firm customers. At a time of ebbing confidence in Wall Street
research, hedge fund respondents indicate that they continue to rely on Wall
Street research when making investment decisions, with 80% of survey respondents
saying that they sometimes pay attention to broker research and 14% saying they
often pay attention to it. Only 6% of survey respondents say they never use
Wall Street research.
Hedge fund managers also tend to focus on fundamental research when making
an investment decision, rather than technical trading factors. Eighty-one percent
of survey respondents indicate they are more likely to look at factors such
as the nature of the business, the character of management and earnings trends
in selecting investments rather than technical trading patterns.
Broadgate’s survey shows that hedge fund managers are extremely hands-on
investors, with half of the respondents indicating that they contact companies
in which their funds have investments or are contemplating investing in one
or more times a month. Another third of respondents contact such companies at
least once a quarter, while only 17% say they never contact companies in which
they have invested.
The survey also revealed that hedge funds may be more long-term oriented than
popularly thought. For example, half of the survey respondents indicate that
the average holding period of their funds is between six months and a year,
and a further 23% said that their average holding period is more than a year.
About two-thirds of hedge fund managers believe that hedge fund trading activity
does not increase market volatility.
Not surprisingly, hedge fund managers believe they have a competitive advantage
over other investors. They overwhelmingly (approximately 95%) feel they are
more likely to outperform conventional fund managers, although approximately
5% of survey respondents disagree. Their confidence appears based on recent
performance trends. During the bear market beginning three years ago, hedge
funds have outperformed the double-digit losses of the major stock indices,
with the CSFB/Tremont Hedge Fund Index up by 5.80% over the one year period
ending April 2003 and up by an average of 10.73% for the period beginning January
1994 through April 2003. The S&P 500 Index, by contrast, is down 8.06% for
the 12 months ending May 30, 2003.
"Hedge funds have shown extraordinary growth in the past few years and
this trend will inevitably bring with it more demands for transparency and investment
process quality," said Thomas C. Franco, Broadgate’s Chairman and
Chief Executive Officer.
"The survey results also reflect the growing importance of alternative
investments in institutional portfolios. The broader acceptance of the asset
class will have dramatic effects on the shareholder lists of many public companies."
About Broadgate Consultants, Inc. Established in 1987, Broadgate Consultants, Inc. provides strategic corporate
and capital markets communications advisory and implementation services to public
companies and private equity firms and their portfolio companies. Its clients
include global public companies as well as private equity firms with assets
under management ranging from $100 million to more than $5 billion. The firm
is also recognized for its crisis management services and is a partner firm
of Public Relations Organisation International, a global network of independent
public relations firms. More information about Broadgate can be found at www.broadgate.com.
