Only one in 10 investors believes increasing regulation of the hedge fund market will protect their interests, while 85 percent say new regulatory requirements will not prevent another financial crisis, according to an Ernst & Young global survey of hedge fund managers and investors.
Only 2 percent of those surveyed feel new regulatory requirements will be ‘effective’ in preventing a future financial crisis, while 13 percent say they will have a ‘neutral’ effect, according to the sixth annual Ernst & Young survey of the global hedge fund market.
The 10 percent of investors who say new regulations protect their interests is sharply down on a 2010 survey that reported 41 percent of investors feeling protected by new regulations. The number of investors who feel new regulatory requirements are ‘ineffective’ in protecting their interests has risen to 49 percent in 2012 from 21 percent in 2010.
‘Our survey findings suggest hedge fund regulations are not beneficial to investors, who overwhelmingly question their purpose and proliferation,’ says Ratan Engineer, global leader of Ernst & Young’s asset management practice. ‘It may still be worthwhile for hedge fund managers to constructively engage with regulators to help them stay focused on the main goal – financial stability – rather than introducing more costly or unnecessary requirements that investors feel are of little value.’
‘Finding Common Ground’, the Ernst & Young survey of managers of 100 hedge funds representing more than $710 bn in assets and 50 institutional investors with assets of more than $715 bn, also finds strong disagreement between hedge fund managers and investors over how to align compensation with risk and performance.
The survey shows that 87 percent of hedge fund managers feel ‘risk and performance are effectively aligned with investor objectives’ as measures for compensation, Ernst & Young says. Only 42 percent of investors agree. In the 2010 survey, roughly half of investors and 94 percent of managers agreed.
Investors also argue that the form of compensation should change. While 75 percent of compensation is currently in cash, investors say about 38 percent of the compensation should be in cash and 20 percent should be in the form of equity in underlying funds. Managers want to maintain the status quo.
