Fund managers struggling to meet investor expectations

04 Aug, 2014

Fifty-nine per-cent of institutional investors have said their funds have either failed or partially lived up to their expectations over the last 10 years, according to research conducted by Aquila Capital, the €7 billion Germany-based alternative asset manager.

“The last decade includes some of the most volatile episodes ever seen in financial markets. Our research shows just how substantial the gap has been between investors’ expectations and what their funds actually delivered,” said Stuart MacDonald, managing director at Aquila Capital.

There is widespread pessimism in the alternatives industry, particularly hedge funds. A study published at the end of July by Preqin found 99% of hedge fund managers and 98% of their investors doubted year-end performance for 2014 would match that of 2013.  Hedge Fund Research data indicates the average manager has delivered gains of 3.15% in 2014, a far cry from the 8.13% returns displayed last year.

This has predictably facilitated some downward pressure on hedge fund fees – the traditional 2% management fee and 20% performance fee. A survey conducted by J.P. Morgan’s Capital Introductions Group in 2013 said 70% of investors expected fees at hedge funds to decline. However, other surveys find clamp-downs on fees have been exaggerated. A study of institutional investors by the capital introductions arm of Goldman Sachs Prime Services found the average management fee to be at 1.6% and the average performance fee to be 18.3% in 2013, a marginal drop from 2012. A study of clients by law firm Seward & Kissel reached a similar conclusion, finding management fees to be pegged around 1.6% while performance fees are stuck around 20%.

Aquila Capital said allocators were sympathetic given the extreme market volatility. Forty-two per-cent told the Aquila Capital study that it has become too difficult to accurately predict future market moves in sector and individual-level securities. “(The survey) also illustrates investors’ appreciation of how extraordinarily difficult it is to make reliable forecasts at different levels of the market,” said MacDonald.

While nearly nine out of 10 (89%) investors said diversification was important (41%) or extremely important (48%) to them, more than one in four (27%) were less diversified than they originally anticipated over the last decade. Investors identified the most common pitfall that could have been avoided over the last 10 years as over-allocating to particular strategies (44%) while ‘over-allocating to certain asset classes’ was a close second (39%).

Aquila CapitalPreqinHedge Fund ResearchGoldman SachsSeward & KisselJ.P. Morgan