Fresh hedge fund investments expected in second half of this year and into 2010, Terrapinn survey

Only 20% said that recent global events have shaken their belief in the industry.

The Conference, which is celebrating its 10th anniversary, is the largest investment conference in the Arab region. It will take place at Madinat Jumeirah in Dubai and will host some of the world's Hedge Fund legends such as John Paulson of Paulson & Co, Leon Cooperman of Omega Advisors, Ian Wace of Marshall Wace and Joseph DiMenna of Zweig DiMenna.

Other speakers include Ahmed Bin Sulayem, Executive Chairman, Dubai Multi Commodities Centre Authority (UAE,) Kevin Birkett, Executive Director of Asset Management at the Dubai International Financial Centre Authority (UAE) and Eric Meyer, Chairman and CEO of Shariah Capital and Board Member of DSAM.

An awards ceremony will also be held on the first day of the conference to celebrate regional hedge fund industry leaders.

Symon Rubens, Managing Director of Terrapinn in the Middle East says, "The dialogue between investors, hedge fund managers and service providers this year is expected to be one of the most fascinating and stimulating discussions the industry has had in a decade. The conference is held against a backdrop of a changing world in changing economies which still offer opportunities for serious players."

The survey, which was conducted amongst 269 institutional investors, fund managers and service providers from around the world and the Middle East, revealed that 39% of investors believe that the current depressed markets and heightened risk premia offer a great entry point for fresh investment. Unsurprisingly, the hedge funds themselves are even more optimistic, with 55% of hedge funds stating that the current environment offers exceptional opportunity.

Responses also showed that there was widespread agreement across the three categories with regard to the reforms that are required, with one exception - the prickly issue of fees.

Investors, fund managers and service providers all agreed that the industry needs to have better transparency (95%, 97% and 97%) and stronger internal risk, compliance and audit functions (93%, 96% and 100%.) They also agreed on the necessity of having stronger self-regulation and statutory regulation.

While 43% of investors rated the issue of fees 'very important' in reviving enthusiasm, only 14% of hedge funds did so. It is not simply lower fees that investors want, but fees which are better structured, to align more closely hedge fund managers' interests with those of investors.

While all categories saw better self-regulation as more important than statutory regulation, the difference between investors and hedge funds was again marked. Thirty two per cent of investors see statutory regulation as 'very important,' but only 13% of hedge funds believe it to be so.

Three key lessons were almost universally acknowledged in the respondents' feedback. Both investors and hedge funds acknowledged that independent administrators and custodians are essential (87% and 92 % respectively) and that a greater match is needed between hedge fund terms and liquidity (85% and 80%.) They also agreed that due diligence is more important than they realized (76% and 73%.)

The more sobering news for hedge funds is the suggestion that they will have to wait until next year for net inflows to the industry to restart. The majority of hedge funds expect net inflows to the hedge fund industry to commence in the second half of this year, but most investors do not expect this to happen before 2010.

According to the survey, the size and timing of future inflows will depend largely upon two things; firstly, economic and market conditions, which are clearly outside of hedge funds' control, and secondly, how hedge funds learn from recent troubles and what reforms they make to restore investor appetite for their offering.

Unsurprisingly, the hedge funds strongly believed that money entrusted to their care needs to stick around longer term. As a result, hedge funds are more enthusiastic than ever to attract capital from long-term, institutional investors such as pension funds.

Some of the hedge funds who responded to the survey said that they are implementing structural changes to make their product offering more attractive to investors. By far the most common response was that funds are looking at how they can improve their transparency. This answer figures at least twice as much as any other issue. The following list appears in order of number of citations:

Changes being considered or enacted by hedge funds
• Greater transparency
• Improved communication to investors, particularly with regard to return attribution analysis
• Improved internal risk management processes
• Amendments to fund terms regarding gates, redemption notices or offering daily liquidity
• Focus on managed accounts
• More dynamic strategies to control drawdowns / more focus on 'absolute return'
• Focus on quality of service providers e.g. administrators, custodian
• Greater focus on investing in liquid assets
• Reduction in fees / offering a variety of fee structures
• Improving due diligence processes
• New product offerings to meet changing requirements of investors
• Lower leverage
• Greater focus on 'values'.