Ernst & Young’s Annual Hedge Fund Symposium in the Cayman Islands provided lively discussion on key issues affecting the industry.
While the hedge fund industry is at a crossroads, product innovation and fresh investment strategies have the sector poised for transformation and growth, and that was a theme at Ernst & Young’s annual Global Hedge Fund Symposium in the Cayman Islands. The event attracted more than 200 government officials, hedge fund professionals and service providers, featured panel discussions by key leaders in the industry and highlighted findings from its 2012 global hedge fund and investor survey.
Event chair Jeffrey Short, EY Cayman-based financial services partner, says the event, themed Turning challenges into competitive advantage, addressed wide-ranging issues facing the hedge fund industry, including increasing costs of doing business, the changing tax environment, and greater regulatory pressures. Panellists also explored major trends in the asset management industry and its future landscape.
One such trend was highlighted in a keynote discussion with speakers Bart Hedges, chief executive officer of Greenlight Capital Re Ltd, and EY partner and head of financial services office hedge fund practice based in New York, Don MacNeal. The pair introduced new and non-traditional investment strategies, using Greenlight Re’s model as an example. The Cayman Islands-domiciled reinsurer includes hedge funds in its investment approach.
“Our investment philosophy allows us to be more selective on the underwriting side and puts less pressure on the underwriters to service the capital—which we believe will allow us to outperform the industry in the long-term” explained Hedges.
Hedges said having a hedge fund investment strategy as the flip side to its underwriting business provides an edge over more traditional reinsurance models with predominantly fixed-income portfolios.
The capital that comes from reinsurance premiums can be invested for longer periods of a year or more, in line with reinsurance contracts, making it a stable source of investment capital for the hedge fund managers. In the third quarter of 2012, investment returns more than offset Greenlight Re’s underwriting losses.
Insights from Ernst & Young’s Global Hedge Fund and Investor Survey 2012: Finding Common Ground, were detailed by Cayman based EY financial services partners Chris Gauk and Baron Jacob.
The 2012 survey, compiled by consulting firm Greenwich Associates for Ernst & Young, compares opinions from 100 hedge fund managers who manage more than $710 billion and 50 institutional investors with more than $190 billion allocated to hedge funds on current topics related to the hedge fund industry.
Among the survey’s key findings is that a fund’s performance, while certainly important, is not the top consideration for investors. Long-term performance is only the fourth most important criterion for investors, after the investment team, investment philosophy, and risk management policies, the survey noted.
New regulations and compliance requirements, with their accompanying costs, are prime challenges facing the industry that are taking a financial toll on hedge funds. Additionally, managers pointed to investor demand for concessions on fees, resulting in a drop in revenues and a squeeze on profit margins.
Another theme emerging from the survey is that two-thirds of pension funds and endowments plan to maintain allocations in hedge funds, and one in five expects to increase allocations over the next several years. It also showed a growing appetite for investing in emerging and start-up funds.
While hedge fund managers and investors remain divided on compensation-related issues, these differences do not appear to beaffecting fund selection or redemptions. Additional transparency is important to investors, but they do not want these costs passed along to them, the survey found.
EY financial services partner Rohan Small moderated a panel which addressed current issues facing the asset management industry. The panel included Ingrid Pierce, global managing partner, Walkers, Keiran Hutchison, EY financial services partner based in Cayman, and Michael Serota, EY partner and co-leader of the global hedge fund practice.
The Foreign Account Tax Compliance Act, (FATCA) is among the leading concerns as firms put policies and procedures in place to navigate the new rules and regulations. FATCA was enacted to prevent offshore tax abuses by US citizens, and will have a significant impact on the industry when it comes into effect in January 2014.
“FATCA is here to stay, and it’s going to expand,” commented Serota. “It will start to migrate to other countries, and become the norm. But trying to make it consistent has the potential for administrative headaches to grow.”
Pierce emphasised innovation in the industry, supportively pre-empting the keynote topic. “Trends such as convergence with the insurance/reinsurance industry are vital to the growth of the hedge fund industry.”
Mike Mannisto, EY Cayman-based financial services partner, moderated a panel on regulation, joined by Mike Garvey, executive director, J.P. Morgan Alternative Asset Management Inc, Yolanda McCoy, head of investments and securities division, Cayman Islands Monetary Authority, and Michael Barnes, EY financial services senior manager based in New York. The panel tackled the issue of responding to developments in regulation, including the two models for an Intergovernmental Agreement (IGA) to comply with FATCA’s provisions.
It also addressed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which requires investment advisers of hedge funds and private equity funds of more than $150 million to register with the US Securities Exchange Commission, among other requirements. Panellists noted these acts, combined with other regulatory demands, have increased costs for infrastructure, staffing, and technology.
However, Garvey noted that with change, comes opportunity.
“I believe the industry is going to go through another growth phase,” he said. “We are a $2.3 trillion dollar industry. We’re not going anywhere—we’re just pausing at the moment, but we’re going to take off.”
Each year, Ernst & Young holds a series of symposia in 20 financial centres around the globe, including the Cayman Islands. A major player in the industry, Ernst & Young has been serving the international hedge fund market for more than 25 years. A team of more than 200 partners, principals, and executive directors, along with 2,000 industry-focused professionals, lead its global hedge fund practice.
Ernst & Young is a leader in assurance, tax and advisory services in the insurance-linked assets space and has a strong network of professionals who service this market on a global basis. Ernst & Young has advised, and continue to advise, the largest number of clients in this area and provides assistance beginning with the first steps of formation.
Ernst & Young refers to the global organisation of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited does not provide services to clients. Ernst & Young Ltd is a client-serving member firm operating in the Cayman Islands.