DIANE HARRISON

BLEAK HOUSE (OR THE OUTLOOK ON HEDGE FUNDS NOW)

BLEAK HOUSE (OR THE OUTLOOK ON HEDGE FUNDS NOW)

Charles Dickens Bleak House spins a tale of mystery, intrigue, family dynamics, and irony in the Victorian age that
had readers gripped by its indictment of the English court system. While the novel is packed with intricate plot twists
and turns, the main story line centers on the contested will case of Jarndyce and Jarndyce, which when it finally
ends, finds that the costs of litigation have entirely consumed the estate. The erosion comparison is unfortunately
apt when compared to the current state of the hedge fund industry.
INVESTORS LOSE APPETITE FOR THE HEDGE FUND NOTHING BURGER
Market choppiness, layered fees, allocation realignments, and burgeoning regulations worked to chip away at the
historical performance trends of hedge funds in 2016. Investors expressed their dissatisfaction with hedge fund
performance to industry bellwether survey group Preqin in their September Investor Outlook: Alternative Assets H2
2016. Some of the findings reveal that:

Four out of every five of the investors interviewed in June 2016 expressed disappointment with hedge funds for
failing to meet their return expectations over the past 12 months.

Significant numbers of investors, approximately 39% of those Preqin surveyed, plan to reduce the amount of
capital they have invested in hedge funds over the next 12 months.

Less than half this figure (18%) plan to increase their exposure.
Fig. 3.8: Reasons Why Investors Have Become More Negative
about the Hedge Fund Industry in the Past 12 Months
Portfolio Has Not
Met Expectations

61%
34%

High Fees

Not Reduced
Portfolio Risk

13%

Not Offering
Downside Protection

13%

Negative Press
about Industry

8%

Not Reduced
Portfolio Volatility

8%
11%

Other
0%

10%

20%

30%

40%

Proportion of Respondents

50%

60%

70%
Source: Preqin

PANEGYRIC MARKETING | OCTOBER 2016

DIANE HARRISON
BLEAK HOUSE (OR THE OUTLOOK ON HEDGE FUNDS NOW)

Hedge fund managers are feeling the impact of this gloomy outlook, and as 2016 winds down, remain concerned
with what implications these views might mean for fund allocations next year.
However, there were some glimmers of hope also captured in this survey data. As global market struggles continue
to foster uncertainty among investors, a good chunk (47%), still believe that hedge funds can navigate this type of
market climate successfully, and 18% are believers in the downside protection and volatility mitigation benefits
these funds can offer.
Fig. 3.7: Reasons Why Investors Have Become More Positive
about the Hedge Fund Industry in the Past 12 Months
47%

Current Market Offers Better Opportunities

18%

Portfolio Met Expectations

12%

Potential for Downside Protection

Reduced Portfolio Volatility

6%

Reduced Portfolio Risk

6%
0%

Portfolio Exceeded Expectations

6%

Other
0%

5%

10%

15%

20%

25%

30%

35%

Proportion of Respondents

40%

45%

50%

Source: Preqin

Managers who outperformed their benchmarks during this period would be wise to present their experiences to
prospects seeking conviction that there are still strategies that can perform to expectations and deliver while
equities and fixed income arent. One way to articulate this is through a case study narrative that walks the investor
though what the hedge fund manager actually did in the difficult market period in which they outperformed. Why
was the investment initiated, how was it managed, and when was it exited and with what end result?
LOWER FEES, PLEASE
Surveyed investors were also able to recognize some improvements that the hedge fund industry has made over the
past year, notably in the general category of fees charged. Significant strides were made in the level of management
fees charged, and how these fees are communicated. Regarding the charging of management fees, almost two
thirds of the respondents felt that movement in the right direction was made, while the majority wants to see even
more of this effort in 2017.
Also interesting to note in chart 3.11 is the rising level of investor interest in applying a hurdle rate to fund terms,
with 57% of respondents desiring to see some form of hurdle applied to fund performance fee calculations. Hedge
fund managers might want to take a close look at how they have described their fees, both management and
performance. They also should ensure that their documentation and marketing efforts articulate how these fees
support the business operations and infrastructure as well as the alignment of interests with limited partners.

PANEGYRIC MARKETING | OCTOBER 2016

DIANE HARRISON
BLEAK HOUSE (OR THE OUTLOOK ON HEDGE FUNDS NOW)
Fig. 3.11: Areas of Fund Terms Investors Feel Have Shown the
Most Improvement over the Past 12 Months and that
Need to Improve Further in the Next 12 Months
Proportion of Respondents

80%
70%

73%
63%

60%

56%

54%

60%

57%
Areas that Have Improved
in Past 12 Months

50%

40%

32%

37%
29%

32%

30%

27%
15%

20%

22%
15%

Areas that Need to Improve

Further in Next 12 Months

10%
Manager Commitment to Fund

Hurdle Rate

More Transparency at Fund Level

Lock-up Period

Performance Fees Amount

Performance Fees How They

Are Charged

Management Fees

0%

KEEPING AN EYE ON THE COMPETITION.

Another interesting piece of data captured by Preqin in this survey centers on the increasingly positive attitude
investors feel toward private equity as an alternative investment choice. An overwhelming 94% of investors feel
positive or neutral about the current state of the private equity industry, a figure that dwarfs the enthusiasm
investors feel about hedge funds currently.

Fig. 2.1: Investors General Perception of the

Private Equity Industry at Present

4%

24%

Positive
Neutral
Negative
71%

Source: Preqin

There are many factors that play into this affirmative state of mind, most notably that private equity investors believe
their investments have met or exceeded return expectations over the past 12 months, and the majority of these
investors plan to increase or hold steady their allocation to private equity going forward into 2017.
This mindset will factor heavily on the future ability of hedge fund managers to sway investors to shift allocations to
hedge funds from other alternative options such as private equity. Its a hurdle to overcome, to be sure, but also
reinforces the need for each hedge fund manager to clearly make the case to investors for commitment to their
strategy and why. Managers wanting to grow or even hold steady on AUM in 2017 might plan to take a hard look at
PANEGYRIC MARKETING | OCTOBER 2016

DIANE HARRISON
BLEAK HOUSE (OR THE OUTLOOK ON HEDGE FUNDS NOW)

their marketing and sales materials and processes to determine if they are answering the straightforward questions
that investors need to have satisfied

What am I offering?
Why is this beneficial to investors?
How does it differ in a positive way from other investments?
Are my terms attractive and competitive?
Does the future market environment hold promise for this type of investment?

Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing

communications firm founded in 2002 specializing in alternative assets. She has over 25 years of expertise in hedge fund and private equity
marketing, investor relations, articles, white papers, blog posts, and other thought leadership deliverables. In 2016, Panegyric Marketing has
been shortlisted for Family Wealth Reports Outstanding Contribution to Wealth Management Thought Leadership and received AI Hedge
Fund's Outstanding Contribution to Wealth Management Thought Leadership, M&A's Excellence in Financial Services Marketing
Communications USA, AIs Innovation in Alternatives 2016, and Wealth & Finance International's Best In Funds 2016 US and their Women in
Wealth Awards Best Financial Services Marketing Company - New York. A published author and speaker, Ms. Harrisons work has appeared in
many industry publications, both in print and on-line. To read more of her published work in alternatives, please visit
www.scribd.com/dahhome. Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.

PANEGYRIC MARKETING | OCTOBER 2016