Better communication needed to rebuild trust in hedge fund industry says report

The investment management industry needs to rebuild trust with investors through a 'back-to-basics' client relationship approach, combining improved communication and education, increasing knowledge sharing and bolstering corporate governance and risk management transparency, according to the latest investment management survey* from KPMG.

The report said better communication holds the key to future success. Communication is needed from investment managers to clients as well as to intermediaries and regulators. This message was driven home through a series of results highlighted by the survey. There were calls by investors and intermediaries for additional training and transparency on products and strategy, for explicit acknowledgement by investment managers of their adherence to industry leading practice codes of conduct and for more direct, face-to-face time with managers as well as other concerns.

The breakdown in trust was particularly highlighted by the fact that financial intermediaries were perceived as being untrustworthy and lacking knowledge. Over three-quarters (77%) of investors said they believed intermediaries were less trustworthy than politicians.

However, over half (58%) of institutional investors said investment managers should provide financial intermediaries with better product training in order to help them regain client trust. This held true for both professional and retail markets.

The research showed managers do not have faith in their own senior-level management being able to drive change, especially with regards to risk management and corporate governance procedures. Well over half (65%) of investment managers globally cited lack of vision by top management as the major obstacle to change, with 90% of managers questioned in the US.

The report also showed regulatory change is expected to hamper the industry significantly, with 81% of respondents saying more regulation will remove opportunities for innovation.

Significant concerns on the cost impact of a regulatory regime was also highlighted with 72% participants saying a regulatory clampdown will seriously increase costs for investment managers and 63% believing investment managers will not be able to pass on these associated costs to their clients.

There was uncertainly about where the emphasis of the regulatory changes will fall. Just over half (53%) of institutional investors said risk management and internal controls will be more strictly regulated in the future while investment managers (77%) believed the focus will be on leverage limitations.

The report surveyed 288 senior executives in 29 countries across the global fund and investment management community with around a third each based in North America, Western Europe and Asia Pacific. The balance of respondents came from the Middle East.

* Renewing the Promise: Time to mend relationships in Investment Management by KPMG International. Datamonitor was commissioned to do the research for the report. The study was conducted between February and March of 2009 and the respondents were investment managers, institutional investors (insurance companies, pension funds and sovereign wealth funds) and retail investors (wealth managers and family offices). A number of in-depth interviews were also conducted by Datamonitor with senior executives from some of the most prominent investment managers and wealth managers in Western Europe, North America and Asia Pacific. Answers were weighted according to the relative size of their organisations' assets under management. In total the investment managers participating in the survey managed $800 billion in assets, the pension funds $227 billion, the insurance companies $181 billion, wealth managers $146 billion, sovereign wealth funds $127 billion and family offices $14 billion.