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The Morning Brief: Managers Feel Pressured Over Fees, Performance

Hedge fund managers are feeling the heat. A new survey of 270 hedge fund managers by London-based data tracker Preqin finds that some 52 percent say investors are more negative about the industry than they were a year ago, and 43 percent think the biggest driver for industry change is investor demand for a more favorable fee structure from managers. Nearly 20 percent said one of the biggest challenges facing hedge fund managers is overcoming the negative perception of the industry. To accomplish that, 69 percent have increased their transparency with investors, and 58 percent have opened their offices for more client visits.

None of this is particularly shocking. Performance for the first half of 2016 has been unexciting, even after a few consecutive months of gains, with Chicago-based data tracker HFR’s aggregate hedge fund index posting a 1.6 percent gain through the end of June. This follows several consecutive years of substandard returns for the industry in aggregate.

At least some managers are starting to sound contrite with respect to the disconnect between the industry’s lagging performance and its persistently high fees. At a gathering of hedge fund honchos earlier this year, managers including Omega Advisors’ Leon Cooperman and Hayman Capital’s Kyle Bass conceded that investors are getting fed up and fees will likely have to come down. And nearly half of all managers Preqin surveyed admitted they did not meet their own performance objectives over the first half of the year.

But not every manager is issuing a mea culpa. Morgan Stanley equity strategist Adam Parker recently polled some long-short equity managers and asked them why their performance has been poor. The number one reason cited by managers was crowding, followed by factor exposures, macro headwinds and poor liquidity. At the bottom of the list: poor stock selection, the factor Parker says should have been number one, according to Bloomberg. “In other words, when performance is bad, it is beta, when performance is good, it is alpha,” Parker wrote, according to the report. “The truth is that 100 percent, at some level, should have said ‘poor stock selection,’ and what these data reveal is that 92 percent of respondents are blaming something other than their stock selection methodology for the current underperformance.”

If equity managers think bad stock selection is at the bottom of the list of reasons why their performance stinks, chances are they won’t see a reason to lower their fees any time soon.

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While the hedge fund managers that Morgan Stanley’s Parker surveyed offered a number of explanations as to what’s causing underperformance, Point72 Asset Management president Douglas Haynes cited one they didn’t: a lack of diversity among firms’ investment professionals. “Our lack of performance is related to sameness,” Haynes said at a 100 Women in Hedge Funds event in Manhattan, according to Business Insider. Hedge funds are piling into the same investments because managers and analysts across the industry have a similar worldview, Haynes elaborated.

“It’s not just [that the potential hire] has the same color and same gender. It’s that they went to the same schools, studied the same thing, played the same sports,” he said, according to the report. “It’s very easy to hire that person and feel safe. Our industry has fallen into that trap.” The report notes that 7 percent of investment staffers at Point72, the firm founded by SAC Capital founder Steven Cohen, are women — which looks bad until you take into account that industry-wide figures are closer to 2 percent, with similar stats for black and Latino investment professionals, the report notes.

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Paul Singer’s New York-based Elliott Management Corp. has liquidated its stake in Polycom, a video conferencing equipment maker, according to a regulatory filing. Elliott announced last October that it had taken a 6.6 percent stake in the company, along with a 9.6 percent stake in telecom provider Mitel Networks, and urged the two companies to merge. That deal fell apart when private equity firm Siris Capital announced on July 8 that it would acquire Polycom — not that Elliott minded, since the news sent shares of both companies surging. “This is a great outcome for all parties involved,” wrote Jesse Cohn, senior portfolio manager at New York-based Elliott, in an emailed statement to Reuters at the time. Elliott sold the Polycom shares at $12.27-$12.28 apiece. In the 13D filing announcing its initial stake, the firm said it paid between $10.20 and $11.35 per share.

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Man GLG, the discretionary investment arm of London-based asset management giant Man Group, said it has added five professionals to its emerging markets debt team. Three of the five will work as portfolio managers based in New York: Phil Yuhn, most recently a portfolio manager at American Century Investments; Jose Wynn, most recently head of FX research at Barclays; and Lisa Chua, most recently a portfolio manager at HSBC Global Asset Management. Ehsan Bashi, who previously advised clients on risk management at KPMG, will serve as a portfolio engineer in New York, while Maria do Carmo Cal — previously head of capital markets at Banco Itaú BBA International — will work as a product specialist based in London. They will report to Man GLG’s head of emerging market debt strategies, Guillermo Ossés, who joined in January 2016. Man Group manages $78.6 billion, of which $27.9 billion are managed by Man GLG.

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