Hedge fund model to be re-evaluated

Conflict of interest

By Vishal Teckchandani
Wed 03 Dec 2008

The hedge fund model will be rethought following the sector's worst performance ever.

The hedge fund model will be re-evaluated following the sector's worst performance on record, according to Man Investments.

"The concept of absolute returns, once a key selling point for the industry, will have to be revised in light of recent losses," a Man Investments report said.

"Investors and asset allocators are likely to take a critical look at the alignment of interest between investors and fund managers."

Hedge fund investors will be looking for more control over their assets and the timing of their entries and exits, due to the sector's unprecedented de-leveraging process.

The conflict of interest between investors with different time horizons, liquidity needs and degree of leverage will also have to be dealt with.

The recent wave of investor redemptions, which forced hedge funds to close shop or fund-of-hedge-funds to halt withdrawals, has been solely on the grounds of liquidity or fear of being last to redeem, according to the report.

This has sparked a conflict of interest between redeeming and remaining investors.

"One way to avoid this issue in the future is through managed accounts, as this structure allows for greater control and flexibility over assets," it said.

"The managed account structure also mitigates the impact of other investors' decisions and gives more portfolio transparency."

More hedge funds are inevitably set to go out of business in 2009, but the funds that do survive will benefit in the long run, the report said.

Hedge funds on average have lost 16 per cent for the year to October, according to Chicago-based Hedge Fund Research.

Citigroup said the industry's assets under management may sink to $1.5 trillion in May 2009, from the $3.1 trillion peak in June this year.

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