Investors are warning hedge funds that they will face redemptions and further pressure to cut their fees unless they can improve their performance, highlighting the strain placed on the industry by a dramatic rise in global borrowing costs.
An aggressive series of interest rates increases by major central banks over the past 18 months has greatly improved the return that end investors such as pension funds can earn while taking minimal risk. Some investors now say that hedge funds need to lift their returns by a similar amount to the move in global borrowing rates — US rates, for instance, have risen more than 5 percentage points since early last year — or risk heavy outflows.
“Whether you are an institutional investor or a private bank it’s a huge deal that the risk-free rate is now 5 per cent,” said Paul Berriman, global head of Towers Watson Investment Management, which manages $200bn for institutional investors such as pension plans and endowments.