Hedge Fund Investors band their muscles

The good thing about the recent financial crisis is that investors have stopped being the hostages of their fund managers to take back their place as the fund’s most important asset. During the shinning years of the industry, many successful managers have developed a sharp arrogance versus their investors. Many funds having reached their full capacity were closed to new investors, therefore the lucky investors, who were given access, had in counterpart to accept a very poor level of transparency. The good returns combined with the secrecy was a very good recipe to catch investors interest as witnessed with the premium paid by some investors, through secondary market platforms, to get access to those managers.

Last year events made the successful recipe turns sour. The once successful managers failed to deliver returns in line with their historical track records and investors realized that they missed operational red flags because of the lack of transparency. The reaction was epidermic and investors massively redeemed from the industry.

David Aldrich, chief investment officer at Swiss Private Bank Union Bancaire Privée, has been one of the first to test the investors’ recovered bargaining power. He threatened to redeem from managers who do not enlist independent agents. Eight of the nine managers affected have acted, or told UBP they will act by the end of the year, he said.

The results are already visible. Man Group in May announced that they are prepared to move to more external valuation based on more investor demand according to a source familiar with the matter reported by Reuters. Currently, valuations are carried out by Man Valuation Services Ltd and by external firms including Citco and Citi Hedge Fund Services, which is administrator for the 1.5 billion pound diversified futures fund. Also in may, the Financial Times has reported that a number of large formerly self-administered funds, including D.E. Shaw and Millennium Management, had appointed independent third party administrators.

The last one to capitulate to investors’ pressure has been Hedge fund firm SAC Capital Advisors. The manager has appointed Citco as an external administrator, Financial News reports. The latter will check the value of the firm’s hedge funds. Citco will begin work from this quarter. Rivals, Caxton Associates and Millennium Management, have also hired International Fund Services and GlobeOp Financial Services respectively as external administrators.

Investors should not take those victories as the end of the game. They have to maintain the pressure on hedge fund managers to make the industry more shareholders friendly and to ensure that we will never get back where we were. Even if last year was painful, it is certainly for the good, as the industry will certainly recover from the crisis stronger than it was before.