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Hedge funds fees will decline overall

Will government regulations squeeze the hedge fund industry and turn it into a glorified clone of mutual funds? Will the hedge funds, which already have about $1.5 trillion assets under management scale up? Can we expect them to become more transparent in their operations? Is it likely for hedge fund fees to come down? Scott Frush grapples with these and more questions in ‘Hedge Funds Demystified’ (www.tatamcgrawhill.com). For instance, on the last question, he is of the view that the issue is not ‘if’ but ‘when’ hedge fund fees will decline overall. Asset-based fees are most likely to remain largely intact and untouched, but performance-incentive fees will see pressure owing to two primary factors, Frush foresees.

The first factor is that with so many new hedge funds being established, managers will reduce their rates from the typical 20 per cent of profits. Second, with many institutional investors increasing their allocations to hedge funds, pressure to reduce rates will increase, he adds. “These institutions will swap capital invested for a reduced rate – a quantity discount of sorts.”

Another prediction of the author is that soon hedge fund investors will be able to hold index-based derivatives, now in their infancy. “In addition, hedge fund indices themselves will improve because there is a concerted effort by data providers and hedge fund managers to provide the best data possible to construct acceptable indices.”

Management capability, the new resource fulcrum

Bharti, Pantaloon, ITC, L&T, Bharat Forge, Patni, Tata Group, Jindal, and Aptech are among the companies that Rajnish Karki discusses at length in ‘Competing with the Best’ (www.penguinbooksindia.com). “Indian companies are slowly becoming as large as those in developed countries, especially if one takes into consideration PPP-(purchasing power parity) based multiplier on rupee revenues,” he observes. Given the high entrepreneurial orientation of the people, and the fact that India has a large number of listed companies – three to ten times more than other emerging markets such as China and Russia, the demonstration effect of a few companies achieving global scales will spread fast, Karki expects.

He finds that management capability, and not capital as earlier, is now central to the growth of Indian companies, be they in knowledge-based industries such as software services, or otherwise. For instance, at the other end of the spectrum, management capability is becoming the primary and fulcrum resource in capital-intensive commodity industries too; they are moving towards a high degree of standardisation of technologies and processes, “so that the real differentiators become the speed of response to price and manufacturing discontinuities as well as the timing and risk management of capital investment decisions,” the author discovers.

Double-check

How to conduct due diligence? “Start with an open mind,” advises the Institute of Chartered Accountants of India in ‘Background Material on Due Diligence’ (www.icai.org). “Do not assume that anything wrong will be found and look for it. What needs to be done is to identify trouble spots and ask for explanations.”

Another advice in the publication is about the need to remember that the exercise is about managing risk. Double-check, therefore, the financials, tax returns, patents, and customer lists, and make sure the company does not face a lawsuit or criminal investigation, the Institute instructs. “Extra caution needs to be exercised if the company has never undergone an audit from an outside accounting firm. The company’s customers can also be quite informative.”

Sustainable performance measures

Sanjay K. Agarwal devotes a chapter to ‘triple bottom line’ in ‘Corporate Social Responsibility in India’ (www.sagepublications.com). The phrase, abbreviated as TBL, and coined by SustainAbility, advocates the need to measure business performance on three gauges, viz. economic, environmental, and social.

“A newer concept, far superior to the TBL concept, called ‘Triple Green Rating,’ is slowly emerging,” the author informs. The parameters here are: being water-positive, being carbon-positive, and having zero solid waste.

The measurement of the success of any business has moved far away from merely bloating bottom lines to its all-round sustainability, writes Agarwal. “Even an assessment of the social and environmental impacts of business has moved away from the mere reduction of emissions or offering of assistance in case of natural calamites to raising of questions as to how a particular product was manufactured, and how and to whom it is marketed.”

Source: The Hindu

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