Hedge Fund Managers Predict Strong Performance in 2011: Survey

Happy days are evidently here again for hedge funds, even as the fragile global economic recovery plods along.

A clear majority of hedge fund managers predict 2011 will be a strong year for new launches, slower redemptions, and fewer closures, according to a survey conducted by the accounting and audit firm Rothstein Kass. The research also found that as hedge funds become more institutional in nature, many are looking to beef up their management teams, with a growing number of firms placing a larger emphasis on operations, compliance and technology.

In a survey of 313 hedge fund managers this past January, Rothstein Kass found that nearly 75 percent expect there to be more launches in 2011. Nearly 63 percent predicted fewer hedge funds will close, and 80 percent see the pace of redemptions slowing down this year, the survey said. 70 percent of the funds surveyed manage less than $500 million.

Meanwhile an increased emphasis on compliance - which began throughout the hedge fund industry prior to the Dodd-Frank bill - has been a boon for investor confidence, the research found. As a result, hedge funds will see a wave of new investments from institutional clients like pension funds, endowments and sovereign wealth funds throughout 2011 and beyond.

"The hedge fund industry has dynamically benefitted from the market recovery," Rothstein Kass Co-Chief Executive Howard Altman wrote in the report. "With pension plans working to overcome significant funding shortfalls magnified by the crisis, many have recently announced increased allocations to non-traditional investments, including hedge funds and private equity funds."

Because hedge funds are growing increasingly reliant on institutional capital, the survey found that an overwhelming majority have become less willing to make leveraged bets. The report said that nearly 78 percent of hedge fund managers are using leverage significantly less in their investments than they were before the 2008 crisis.

"As institutional capital has become more influential, the hedge fund industry has generally scaled back leveraged investing further," wrote Kelly Easterling, principal of Rothstein Kass' Walnut Creek, California office.

To illustrate the growing influence of institutional capital on hedge funds, the survey points out that in 2007, only 20 percent of managers expected institutional investors would be the dominant source of capital for the industry. Three years later that figure soared dramatically, with 70 percent of managers predicting institutional funds would be the key source of capital for hedge funds.

And when those institutional clients invest big money in hedge funds, they're demanding their money managers tighten up their operational structure. The survey found that 92 percent of fund managers are focusing more closely on due diligence in 2011 to appease regulators and investors, the survey said.

"Everything, including organizational structure, reporting process, technology and service provider relationships is a factor in capital raising efforts," wrote Jeff Kollin, head of Rothstein Kass' financial services advisory unit.

"This is consistent with our advice to clients to act institutional."

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio