Breaking News
Investing Pro 0
Cyber Monday Extended SALE: Up to 60% OFF InvestingPro+ CLAIM OFFER

Ernst & Young On Investor/Manager Splits

By AllAboutAlpha Market OverviewNov 26, 2012 01:00AM ET
Ernst & Young On Investor/Manager Splits
By AllAboutAlpha   |  Nov 26, 2012 01:00AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

A new report, Finding Common Ground, prepared by the auditing/accounting giant Ernst & Young in conjunction with Greenwich Associates, indicates that investors and managers are drifting apart on a range of issues: among these managerial compensation, selection, and redemption criteria.

The report also indicates that investors are quite skeptical about the effectiveness of regulation.

This is Ernst & Young’s sixth annual survey of the global hedge fund market. On E&Y’s behalf, Greenwich Associates asked questions of 100 hedge fund managers, with total assets under management of more than $710 billion, and 50 institutional investors.

One of the questions asked the latter group was: how effective do you believe are contemporary regulations? The issue of effectiveness was broken down into two parts: do regulations protect your interests as investors? And, will they help prevent the next crisis?


As this chart indicates, only a sliver of investors (2 percent) believe that regulation is effective in preventing the next crisis. Indeed, even the number of those who are neutral on that point is smallish, because a full 85 percent see regulations as ineffective for that purpose.

Skepticism is not quite so intense on the matter of the value of regulations in protecting investors, but even here, nearly five times as many investor respondents think it ineffective as think it effective. Furthermore, skepticism has increased over the last two years – that is, over the period since the passage of the Dodd-Frank Act in the U.S.

The report quotes one North American investor saying: “Regulations are basically meant to solve last year’s wars.” It also quoted an EMEA hedge fund noting that regulation has forced it to register in a number of jurisdictions worldwide, “even where we don’t have a physical presence.”

Managerial and investor attitudes are far apart on the question of how the former should be compensated.

The managers of hedge funds (by 87 percent affirmative to 13 neutral and 0 percent contrary) believe that their current compensation system aligns their performance with the interests of their investors. But only 42 percent of investors believe that it does so. Forty four percent say they are neutral on the subject, and a small but still healthy slice of investors, 14 percent, say outright that interests are not aligned.

More specifically, the two sides of the table differ on the use of cash payments. Managers report as the above graph indicates that 74 percent of their compensation is in cash. Investors think that number should be cut nearly in half, to 38 percent.

E&Y writes, “It is unlikely that this gap will be closed in the near future,” in part because the sort of tax structures that facilitate “mutually beneficial” structures have been prohibited or diminished of late.

Another split is this: hedge fund managers may not be on top of how their investors are thinking about redemptions.

Asked which two or three factors (aside from those under the control of management itself) are the most likely triggers for redemption, both managers and investors unsurprisingly named performance more than any other single trigger.

But the second most commonly named trigger among investors was a “change in key personnel” at the hedge fund. Eighty-four percent of those asked included this among their “two or three” factors, nearly as many as those (82 percent) who said “performance.” Investors see themselves as having invested with a particular team, perhaps with one or a small number of "stars." Managers themselves don’t see this as a likely trigger.

Finally, managers don’t quite grok the way in which investors chose managers. Managers think their own past performance is what will get them selected whereas investors seem to have internalized the wise and oft-repeated axiom that past performance is no guarantee of future results. Investors evaluate the hedge fund management team itself (hence the difference over redemptions noted above). They are also keen to look at a hedge fund’s risk management policies and oversight as part of their due diligence.

Transparency, on portfolio holdings and on performance attribution, is a bigger issue for investors making their fund selections than managers have yet come to understand.

Ernst & Young On Investor/Manager Splits

Related Articles

Ernst & Young On Investor/Manager Splits

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email