Capacity tops investors' concerns
One of the most interesting findings to emerge from Credit Suisse’s annual investor survey was that the top concern for allocators in 2014 were fears some of the larger hedge funds could reach capacity.
It is not wholly unjustified. A number of managers are closing to new money, returning cash or metamorphosing into family offices to escape the tidal wave of regulations on both sides of the Atlantic.
There have been several high-profile examples of managers returning cash to their clients or shuttering to new investments, most notably Louis Bacon who announced in August 2012 he would return $2 billion from his flagship fund to investors in order to make it more nimble. Explaining his decision in a letter, Bacon admitted his fund had become too large to generate decent returns in the then choppy markets.
Many argue the sluggish returns that have been endemic in the hedge fund world of late are attributable to the fact that the industry has simply gotten too big. In bygone eras, managers were small enough to move in and out of positions without much fanfare. This is no longer the case. Fuelled by the surge in institutional money, many hedge funds are simply too unwieldy to deliver the returns of old.
It is not just concern about performance but some of the established names in the hedge fund industry are simply electing to exit the business altogether and run money as a family office devoid of external investors to circumvent the torrent of regulations.
The toll of the regulatory workload on hedge fund chief operating officers (COOs) is well-documented. Having just about navigated their submissions of Form PF and Form CPO-PQR to the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) respectively, many hedge funds are now having to toil over their Annex IV reports courtesy of the EU’s Alternative Investment Fund Managers Directive (AIFMD) not to mention the reporting of all of their over-the-counter and exchange traded derivatives as mandated under the European Market Infrastructure Regulation (EMIR). It is unsurprising therefore the likes of Soros and Icahn are establishing family offices.
Despite this, Credit Suisse is optimistic, highlighting the capacity constraints at these large hedge funds will provide additional capital raising opportunities for newer and mid-sized hedge funds.