CSFB/Tremont survey shows most hedge funds posting big shortfalls
More than 90% of long/short portfolios covered by CSFB/ Tremont were below their high watermarks towards the end of 2002.
Low and volatile returns over the past year have left hedge fund managers across most strategies trying to maintain clients under increasingly tight margins.
As most hedge funds impose high watermarks to their 20% performance fees, they cannot collect these charges from investors until they have made good previous shortfalls.
This has led to a rise in the annual management fees on many portfolios, up from the typical 1%pa management charge to 1.5% and 2% in some cases.
According to data from CSFB/Tremont, of the funds below their high watermarks as of 31 October, emerging market portfolios were the worst off.
They lagged on average 22.6% below the mark, while long/short funds had to make up 17.3% before they could start charging performance fees.
Long/short is one of the most common hedge fund strategies, involving the use of long equity positions and derivatives to short out-of-favour stocks.
Oliver Schupp, president at CSFB/Tremont, said while remaining open under water may work for large funds that can still afford to run a business while sustaining a critical mass to keep making meaningful investments, smaller sub-watermark funds will struggle.
'There is often a decrease in assets that comes with a decrease in performance. If you were $500m and went down to $80m or $120m, it is unlikely that strategy will remain successful and I would expect them to close down shop, but if you can keep your assets, and your investors really believe in you, you may be okay.'
Schupp said he expected to see more funds blow up and then reopen with a new baseline for their fees.
'If you are a long-standing investor you may get a break on some of the fees if they do this,' he noted.
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