Hermes calling for hedge fund shake-up

Date: Monday, June 1, 2009
Author: Jenny Davey and Kate Walsh , Times

Goliath of the pension funds leads charge to open up the industry to greater scrutiny

Hermes is calling for a post-credit-crunch shake-up of the secretive hedge-fund industry.

The manager of the BT pension fund, handling more than £30 billion of funds in total, has set up an action committee to pressure hedge funds to hand over more financial information about their funds and better align their fee structures with investors.

The news comes after a tumultuous year for the industry that was dominated by scandals and poor performance. The average hedge fund was down 19% in 2008, according to Hedge Fund Research, and about 1,500 of the 10,000 global hedge funds were forced to shut down.

Matteo Dante Perruccio, chief executive and founding partner of Hermes BPK Partners, the group’s boutique hedge-fund arm, told The Sunday Times that hedge funds needed to adapt.

“We want to get together with like-minded funds to create an action committee to provide leadership in the hedge-fund industry. We want to apply pressure in a constructive way through dialogue – and we can take up a leadership position.”

Perruccio said investors approached hedge funds to provide diversification, so they needed more detail about what their money was going into. Hermes will also press for greater liquidity, to make it easier to buy and sell stakes in funds, and for fee structures to make sure fund managers are rewarded only when they deliver good performance.

Greater transparency should address some of the factors that contributed to the $50 billion (£30.8 billion) Bernie Madoff scandal last year when investors, including professional funds of funds, got scant information about strategies, ultimately costing them millions.

Hermes has gained a reputation as a leader in good corporate governance, so the initiative will be closely watched by the investment community.

Perruccio said: “I believe that hedge funds want to do the right thing. Sometimes they don’t provide information because nobody has ever asked them for it. One fund wouldn’t give us its pricing policy - but we engaged and got results.”

The BT pension fund has committed £900m to Hermes BPK to invest in hedge funds. When the fund is fully invested it will have assets under management of £1.3 billion - over the next three years Perruccio aims to treble that.

“Our industry has been reduced dramatically, so there are a lower number of competitive players, and for the Darwinian survivors this is the largest historical opportunity,” he said.

Hermes’ drive for greater disclosure comes at a time when governments around the world are trying to impose greater regulation on the sector. Politicians have been critical of the hedge-fund practice of shorting - profiting from a falling share price - and recently President Obama criticised them for blocking an out-of-court restructuring of Chrysler’s £4.7 billion debt pile, which tipped it into bankruptcy.

The European Commission published a directive on hedge-fund regulation last month. The proposals included limits on the amount of debt funds can use and greater transparency levels, but were viewed by the industry as highly punitive and unworkable.

Florence Lombard, executive director of the hedge-fund trade body Aima, said: “We are concerned that the process of drafting the directive has been subjected to political pressure.”