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Hedge Funds - End of the "Gilded Age?" - Global Perspectives White Paper - March 2013

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America’s top 25 hedge fund managers make more than all the CEOs of the S&P 500 combined”​​​​ …

America’s top 25 hedge fund managers make more than all the CEOs of the S&P 500 combined”​​​​

​The Economist, October 2012

​Hedge Funds have had an incredible run over the last 2 decades. The annual salaries and bonuses of the most successful managers have been amongst the highest paid to anyone, anywhere, ever.

Astronomical wealth has kept everything from top end international property to luxury goods to private yachts afloat for many years.

This is starting to change.

Multiple headwinds of lacklustre performance, increasing competition and invasive regulation are starting to bite.

​This White Paper examines these trends and asks the question - have hedge funds reached the end of their "Gilded Age"?

Sign up for all Global Perspectives White Papers here-

http://www.globalperspective.co.uk/end-of-gilded-age#!whitepapers/c1a4e

Published in: Economy & Finance

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  • 1. A Global Perspectives White Paper Hedge Funds - end of the “Gilded Age”? By Shane Brett, Managing Director Global Perspectives www.globalperspective.co.uk th Date 21 March 2013
  • 2. Contents IntroductionIntroduction 2Background 2 "America’s top 25 hedge fund managers make more than all the CEOs of the S&P 500 combined”1. New Remuneration Regulation 3 The Economist, October 20122. Lackluster Performance 33. Convergence of Mutual and Hedge Hedge Funds have had an incredibleFunds. 4 run over the last 2 decades. The annual salaries and bonuses of the most4. Competition from Exchange successful managers have beenTraded Funds 4 amongst the highest paid to anyone, anywhere, ever.Conclusion 5 Astronomical wealth has kept everything from top end international property to luxury goods to private yachts afloat for many years. This is starting to change. Multiple headwinds of lackluster performance, increasing competition and invasive regulation are starting to bite. This White Paper examines these trends and asks the question - have hedge funds reached the end of their "Gilded Age"? Background Many of the very highest earning hedge funds and private equity managers earned annual income a dozen times higher than the CEO of Goldman Sachs (e.g. Blackstone).
  • 3. It is amazing that hedge fund The fund remuneration policy must bemanagers have escaped the made known to investors in the fund.public vitriol reserved for the Further details will be required by theirinvestment banking community. local regulator. Details of payments toThis is primarily because no staff will be out in the open andhedge fund has ever been bailed transparent for the first time. It is a seaout with public money and their change for the industry.remuneration has remainedbelow the public radar. Another crucial point is that these rules apply to any fund marketed in Europe.This is now changing, most This point has yet to be fully understoodprominently in Europe. in other international locations (like the US). In future to even try to seek investor capital from Europe, your fund must be fully compliant with the wide-1. New Remuneration ranging AIFMD regulations - of which Regulation the remuneration rules are only one small part.The Alternative InvestmentManagers Fund Directive The Directive makes this third country(AIFMD) was finalized in compliance process a gradual processDecember 2012 and it contains but by 2018 non-European managerssome very specific rules relating active in Europe will be forced toto future hedge fund manager introduce compliant remunerationremuneration. These rules will policies - or forsake capital investmentapply from July 2013. from the world’s largest trading block.All hedge funds managed or To make matters worse the EU wants tomarketed in the 27 European extend their recently agreed bankingcountries of the European Union bonus rules to cover hedge funds,will have to pay their employees effectively limiting annual bonuses toat least 50% of their one time salary (or two times with 75%remuneration package in the form shareholder approval).of shares in their funds. Cashpayouts are limited to half These regulatory changes will all have aemployee’s annual income. negative impact on remuneration throughout the industry.Furthermore, the same sharescannot be divested for at least 3(and preferably 5) years. There isno leeway here. The rules are 2. Lackluster Performancewritten in such a way that theymust be directly transposed into Compounding this new proscriptivethe law of each European regulation is the lackluster performancemember state as is. of many hedge funds over the last 5Global Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843
  • 4. years. For this they have only pressure on both performance andthemselves to blame. management fees.Once again in 2012 many of the Salaries and bonuses have always beenlargest funds saw disappointing far lower in the traditional mutual fundgains in a largely positive general industry, primarily due to the lack ofmarket. Poor performance performance fees. This convergence istranslates into far lower incentive set to continue and will further threatenfees and also effects potential the old “2 & 20” model.future capital allocations.It also gives investors the upperhand in fee negotiations and will 4. Competition from Exchangealso apply downward pressure on Traded Fundsboth future performance andmanagement fees. In addition to mutual funds adopting hedge fund strategies, an increasingThe difficult for many hedge threat to hedge fund revenue comesfunds in out-performing the from the rapid growth of Exchangemarket is a reflection of their Traded Funds (ETFs).huge success in recent decades.How can hedge funds outperform Since they exploded onto thethe market (and earn large investment scene over a decade agoperformance fees) when to a the growth of ETFs has been stunning.large extent they are the market? Where they initially tracked indices or stock exchanges, they now offer far more diverse investments in a huge variety of specific sectors. Many of3. Convergence of Mutual and these strategies are specificallyHedge Funds. designed to mimic hedge funds and – crucially – they are far cheaper forA wider trend taking place cross investors.the global asset managementindustry is the gradual The growth of ETFs is set to continueconvergence between mutual and will prove a challenge to manyand alternative funds. Mutual hedge fund managers who will be underinvestors want access to hedge pressure to differentiate themselvesfund strategies and hedge fund from these low cost funds, as well asinvestors want the liquidity and justify their own high fees.transparency of mutual funds.This trend has been widely notedbut less has been said about thelikely effect it will have on fundsprofits. This will exert downwardGlobal Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843
  • 5. Conclusion Sign up for all Global Perspectives monthly White Papers at-It now looks likely that the goldenera of widespread immense http://www.globalperspective.co.uk/#!whhedge fund profits finished with itepapers/c1a4ethe global financial crisis.A new set of pressures frominvestors, regulators and Order the new book-competitors has put the existinghedge fund revenue model underconsiderable stress. “The Future of Hedge Funds”Nonetheless, for many managers By Shane Brettthat perform, hedge funds will stillbe a very lucrative business. The last 2 decades have transformed the Hedge Fund industry from a niche investment segment to a massive globalMany wider trends also point to industry.long term industry growth. In this excellent and wide-ranging studyThe 2012 “Fiscal Cliff” agreement of the Hedge Fund industry, Shane Brettin the US left the favourable examines the main issues and trends“carried interest” rules for hedge currently taking place, and analyses howfunds and private equity intact. they will affect the future of the industry. This includes-The on-going global hunt for yieldwill continue in a zero interest • Changing investor demands across therate / QE infused world. industry,The years ahead will see a • New regulatory requirements - includingworldwide surge in asset FATCA, AIFMD & the JOBS Act,management investment as • Future operational trends - includinggovernments and companies Operational Due Diligence & Managedback away from pensions and Account Platforms,people need to save more fortheir retirement. • Emerging Service Provider opportunities – including Hedge Fund Administrators,All this will be underpinned by • Hedge Fund investment strategy -continued economic expansion in including new emerging investmentglobal emerging markets. opportunities,The challenge for hedge funds • Best practice change management –will be to preserve their revenue how to manage Hedge Fund industrymodel, while delivering value to change.their investors.Global Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843
  • 6. The “Future of Hedge Funds” alsoexamines the current and futureglobal economic environment andwhat this will mean for HedgeFunds in the years ahead.Available from Amazon inpaperback here-www.amazon.com/Future-Hedge-Funds-Trends-industry/dp/1481130226/And for Kindle here-www.amazon.com/The-Future-Hedge-Funds-ebook/dp/B00AHACY8YGlobal Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843