Hedge fund managers feel they aren't out of the woods quite yet.
Seven out of 10 said they expect a "trying" year as the industry faces regulatory oversight and competition picks up with more funds likely chasing investment dollars, according to a survey by accounting and audit firm Rothstein Kass.
"It is no surprise that the outlook for 2010 echoes the concerns of 2009 rather than the unbridled optimism of years past and reflects a more conservative approach to the future," Rothstein Kass consultants wrote.
Hedge funds rebounded last year from 2008's deep losses with an average 19-per-cent return. But this year's market gyrations highlight the pitfalls that are still present two years after the financial crisis. Many prominent managers were caught off guard by May's sharp selloff and nursed heavy losses that left the funds, on average, roughly flat for the first five months of the year, data from Hedge Fund Research show. June's performance numbers are expected next week.
At the same time though, there are some bright spots with almost three-quarters of the managers saying they expect investors to stick around longer as the pace of redemptions falls off.
Rothstein Kass surveyed 381 hedge fund firms in the first half of 2010 and will release the findings of its fourth annual survey on Tuesday. Reuters obtained a draft of the report.
Eight out of 10 managers also expect to see more new hedge funds launched this year by newcomers and by existing firms that are planning to roll out new portfolios.
Halfway through the year, prominent managers ranging from former Goldman Sachs partner Mark Carhart to former Atticus executive Dilan Siritunga are talking to investors about making commitments to new funds.
However, hedge fund managers also said it is tougher to raise money now because investors are more nervous and will be writing smaller checks to newcomers.
Eight out of 10 managers surveyed by Rothstein Kass think new hedge fund managers will have to rely more heavily on seed capital where backers often take a stake in the new company, instead of raising money mainly from institutions and wealthy investors.
"As they engage in capital-sourcing activities, hedge fund managers face greater competition from a variety of sources , including ETFs and mutual funds that purport to replicate hedge fund strategies," Howard Altman, Rothstein Kass co-CEO said.
Other bigger changes also loom on the horizon for the $1.6-trillion (U.S.) industry.
Most managers resigned themselves long ago to the idea that their once largely opaque industry will soon face closer scrutiny from regulators. They are almost equally split on whether registration will come in the second half of this year or the first half of next year.
The U.S. House of Representatives gave final approval to a financial overhaul this week and the Senate will vote later this month.
Also roughly half of managers surveyed expect fees that hedge fund managers charge - often 2 per cent of assets managed plus 20 per cent of profits on investments - to come under pressure.
Newcomers who lack the track record and marquee name of established firms will be ready to compromise first in order to build their businesses, the survey found.
"When hedge funds are willing to negotiate fee arrangements, they have consistently received concessions from investors in return for this flexibility," said Jeff Kollin, a principal in Rothstein Kass's financial services advisory group.