Opinions of the Hedge Fund Community

Research Conducted Exclusively by RSM McGladrey

Thursday – June 25, 2009
Table of Contents

Forward........................................................................................ 3
Executive Summary...................................................................... 3
Detailed Findings
Baseline Opinions................................................................... 5
Market Predictions................................................................. 6
Economic Growth................................................................... 7
Government Performance...................................................... 8
Government Involvement....................................................... 9
Impact of Economy on Hedge Funds....................................11
Future Market Opportunities.................................................14

Participating Demographics.........................................................15
Methodology...............................................................................15
About RSM McGladrey and McGladrey & Pullen........................16
Contact information.....................................................................16

2 | Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey
Forward
On behalf of the professionals at RSM McGladrey and
McGladrey & Pullen, welcome to our inaugural Hedge Fund
Industry Survey. We recognize the industry’s ability to spur
investments and assist in the strengthening of the national
economy and acknowledge the unprecedented changes facing
us as proposed government regulation works its way through
Congress. Prior to the announcement of these proposed
changes, RSM McGladrey engaged the noted opinion research
firm Penn, Schoen & Berland Associates (PSB), to give voice to
the opinions, concerns and insights of hedge fund managers
and senior executives in a lengthy survey with 102 respondents
conducted between May 20 and June 4, 2009.
This survey is part of our ongoing commitment to the hedge
fund industry. McGladrey’s dedicated Financial Services Group
Practice is one of the largest and most experienced practices in
the country, providing audit, tax and business consulting solutions
to more than 1,200 hedge funds/investment partnerships, fund of
funds, investment advisors, broker-dealers and future commission
merchants, including more than 300 private equity groups.
We will continue to provide our perspective on how current
events continue to impact the hedge fund industry from a
governance, structural, regulatory and financial perspective.
We hope you will find the results interesting and that the
findings will encourage discussion and dialogue between the
industry and its various publics. Please feel free to contact us
and share your ideas and comments.
Regards,
Kislay (Sal) Shah, CPA
Simon Lesser, CPA
Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey |
Executive Summary
When the definitive chronicle of the global financial crisis is
someday written, Wednesday, June 17, 2009, may be looked
back on as a sort of D-Day for hedge funds. On that day, the
Obama Administration announced a proposal to restructure the
U.S. financial regulatory system that has prospered for years
with minimal government scrutiny or oversight. This series of
moves, news reports suggest, could have both an indirect and
direct effect on the hedge fund industry. Not only will funds
have to register under the president’s plan, the proposal will give
the Federal Reserve new oversight powers and give the govern-
ment the ability to unwind financial institutions that may pose
systemic risk including – potentially – to some hedge funds.
Faced with changes to how they may have to operate and use
their capital and liquidity, hedge fund managers – and their
customers and other stakeholders – are bracing for sweeping
changes that will be rolled out in the near future.
Against the looming specter of these changes, RSM McGladrey
worked with the noted opinion research firm, Penn, Schoen &
Berland Associates (PSB), to tap into the opinions, concerns
and insights of hedge fund managers and senior executives in a
lengthy survey with 102 respondents between May 20 and June
4, 2009. Indeed, as the data indicated, foremost on their minds
was not another headline-grabbing scandal that has marked
coverage of the investment industry since the arrest of Bernard
Madoff on Dec. 11, 2008. Instead, the industry is most con-
cerned about how the proposed regulations will develop in the
coming weeks and months.
The respondents in this study are, fundamentally, optimists,
but not blindly so. They note how the economic downturn has
affected them, in many cases severely, but they see, long term, a
silver lining that comes with any fundamental “reset” of an eco-
nomic system. Benefits will come, they believe, to those who are
resilient enough to work through the current downturn and take
smart, calculated risks to capitalize on the upheaval. If they can
only determine the best path forward to operate under increased
government regulation, they see significant opportunity ahead.
3
l Overall, respondents believe the hedge fund industry is viable
and can survive this period of economic turmoil. They say
that the likelihood of the hedge fund industry being outlawed
or banned by the current administration or Congress is low –
about 8 percent.
l In fact, 60 percent feel the current economic environment
presents more investment opportunities than challenges.
l However, opinions about the path to recovery – what needs
to be done, how it should be done, and how long it will take –
are varied. This is due, in part, to:
– An overarching concern (mentioned by nearly half of
respondents) that the government will go too far or become
too involved in regulating the industry. Respondents believe
that onerous government regulation is the biggest threat to
the hedge fund industry – significantly above fraud of the
type that brought down Bernard Madoff and others.
– Additional concerns about the government’s reaction to the
economic downturn so far. The Obama administration’s initial
reactions to the economic crisis have earned a mixed report
card, at best, from the hedge fund managers interviewed.
– Uncertainty related to ongoing market instability and
volatility at both the fund and financial market levels.
While the hedge fund managers express a level of long-
term optimism, they suggest more pain is in the offing.
l While the hedge fund managers may have their criticisms,
they know that certain steps, in some cases dramatic steps,
are needed. Despite the over-regulation concerns expressed
in the interviews, four in 10 feel more regulation is necessary
to improve the economy (twice the amount of respondents
that believe that less regulation is needed).
l When will recovery come? Consensus focused in on 2010.
In fact, six in 10 feel the U.S. economy and financial markets
are on the right path and will see positive growth next year.
However, this may not be reflected in advance of the major
indices that financial professionals follow. In the survey,
hedge fund managers forecast little or no growth in the Dow
Jones Industrial Average, the Russell 2000 and the S&P 500
average from their current position. Additionally, hedge fund
managers foresee higher taxes, declining real estate values
and increased unemployment that, collectively, will continue
to pose significant challenges ahead.
4 | Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey
l Hedge fund managers acknowledge the pain, including pain
in their own funds, but remain optimistic. Though the major-
ity of hedge fund respondents (eight in 10) say their firm has
been affected by the economic downturn, few adjustments
are in the works, they say.
– Their access to talent seems secure, despite headlines
to the contrary. Less than 10 percent of respondents
say they have revised, or are considering revising, their
incentive fee structure to retain key talent.
– While many stories have pointed to a potential exodus
of hedge fund talent due to underperformance of their
funds, the survey indicates that only 12 percent say they
are reexamining management equity plans and reworking
hurdle risks due to losses.
– Another issue in recent hedge fund headlines – whether
funds will seek to hold on to their depositor’s cash for
extended periods – seems to be the exception rather than
the rule. In the survey, only 16 percent are considering
lockup periods for new investors.
l But reality is beginning to sink in, based on findings from the
survey. The days of easy returns and the ability to make risky
bets are over. According to the survey, 40 percent of hedge
fund managers have reduced their tolerance for risk.
l When it comes to the derivative market, there is a clear
appetite for requiring minimum reserve levels. Assuming the
market for derivatives does become regulated, the survey
shows that three in four support requiring minimum reserve
levels for all hedge funds.
Baseline Opinions While expectations are in place for increased taxes, the top
box responses were more moderate. Among respondents,
Right Track/Wrong Track 86 percent forecast an increase in marginal tax rates and 85
percent saw an increase coming in capital gains tax rates but,
Among hedge fund managers, sentiment has not yet fully
compared to the top box response on increase in spending, only
moved into the firmly optimistic category. Responses are
29 percent see those tax rates increasing “a lot.”
largely divided when assessing the current direction of the U.S.
economy and financial markets. While nearly six in 10 say the Do you expect this to increase a lot, somewhat
economy and markets are headed in the right direction, respon- increase, somewhat decrease, or decrease a
dents anticipate increases in government spending, increases lot in the next year?
in marginal and capital gains tax rates and higher domestic Increase/
unemployment in the coming year. The numbers for wrong di- Showing Increase a lot over All Decrease
rection – 42 percent for the economy and 46 percent for financial Federal government spending 72% 93%/7%
markets – show that hedge fund managers have not yet fully
The Fed’s balance sheet 54 82/16
bought into the Obama administration’s approach for economic
Marginal tax rates 29 86/10
recovery. Additionally, as was revealed in the study, hedge fund
Capital gains tax rates 29 85/11
managers believe real estate values are not expected to rebound
National unemployment rate 20 83/14
in the next twelve months.
Government bond yields 20 66/30
Currently, do you feel the U.S. ____ is headed in the right Inflation 18 82/16
direction or the wrong direction? Interest rates 13 82/15
Financial Value of the dollar against other 2 16/83
Economy Markets major currencies
Right direction 57% 59% TED spread 2 41/36
Wrong direction 42 40 Consumer spending 0 33/65
Don’t know 1 1 Residential real estate values 0 23/70
Commercial real estate values 0 13/83
Key Indicators

In the RSM McGladrey study, interviewers spent significant time
probing hedge fund managers about whether they expect cer-
tain benchmarks to rise or fall over the next 12 months. When
we look at “top box” – the data point that differentiates which
indicators will rise or decline significantly over the next year,
there were several key indicators which hedge fund managers
expect declines or increases. Among respondents, 74 percent
envisioned a large increase in government spending and 54
percent projected a sizable increase in the Fed’s balance sheet.
Other increases are projected as well according to the survey,
including spikes in the unemployment rate, inflation and interest
rates as well as government bond yields.
Declines are expected real estate, according to hedge fund
managers. Among respondents, 83 percent forecast a continued
decrease in commercial real estate values over the next
12 months and 70 percent foresee a similar decline in residential
real estate values. The U.S. dollar will be another victim over
the next 12 months, according to the survey, with 83 percent
forecasting a further weakening relative to other major currencies.

Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey | 5
Market Predictions l Today, the Russell 2000 average stands at 511.83. The 52-week
range for the average is between 342 and 764. Here too, there
Presumably, hedge fund managers possess unique insights into
is little optimism for the high end of the range to be achieved
the direction of the markets and their prognostications make for
again within the 12-month time horizon. For the Russell 2000,
an interesting perspective on the near (six month) and longer
only 19 percent of hedge fund managers project the average
term (12 month) future. As of the writing of this study – June
climbing higher than 600 within the next six months, while 28
15, 2009 – major indices stand as follows:
percent see the average reaching that plateau within a year.
Dow Jones Industrial Average: 8,612.13
Russell 2000 Average 511.83 Where do you see the Russell 2000 average ____ from now?
S&P 500 Average 923.72 Six Months One Year
Across indices, little, if any, growth is expected within this year Below 400 8% 6%
among hedge fund managers. Projected index averages are in 401 to 450 10 2
line with current market averages. When looking ahead another 451 to 500 10 9
six months, however, as the calendar turns into 2010, more 501 to 550 11 11
optimism is apparent as hedge fund managers believe each of 551 to 600 10 11
these three key market indices will move higher. 601 to 650 5 8
l Today, the Dow Jones Industrial Average stands at 8,612.13. 651 to 700 2 2
The 52-week range for the average is between 6,440 and 701 to 750 5 4
12,381. Hedge fund managers do not expect to see those 751 to 800 6 8
highs again anytime soon. For the Dow, only 5 percent of 801 to 850 1 5
hedge fund managers see the average climbing higher than 851 to 900 0 1
9,500 within the next six months, while 14 percent see the
Over 900 0 0
average reaching that plateau within a year.
Don't know 33 34

In which of the following ranges do you think the

DOW average will be closest to ____ from now?
Six Months One Year
Below 8,000 32% 22%
8,001 to 8,500 22 22
8,501 to 9,000 25 22
9,001 to 9,500 16 21
9,501 to 10,000 3 7
10,001 to 10,500 2 2
10,501 to 11,000 0 4
Higher than 11,000 0 1
Don't know 1 1

6 | Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey
l Today, the S&P 500 average stands at 923.72. The 52-week
In which quarter do you think the U.S. economy returns
range for the average is between 666 and 1,366. According to to positive growth?
hedge fund managers, the average will be lucky to top 1,000
All
within the next 12 months. For the S&P 500, only 17 percent
Q3 2009 6%
of hedge fund managers see the average climbing higher than
Q4 2009 27
1,000 within the next six months, while 32 percent see the aver-
Q1 2010 15
age reaching that plateau within the next year.
Q2 2010 21
Where do you see the S & P 500 average ____ from now? Q3 2010 10
Six Months One Year Q4 2010 12
Below 750 6% 6% Q1 2011 5
751 to 800 18 4 Q2 2011 1
851 to 900 25 27 Q3 2011 1
951 to 1,000 26 22 Q4 2011 2
1, 000 to 1,100 12 15 Not till 2012 0
1,101 to 1,200 3 10 Other 0
1,201 to 1,300 1 6 Don't know 1
1,301 to 1,400 0 0
Which Sectors Will Benefit Most?
1,401 to 1,500 0 0
Over 1,500 1 1 The next question asked of respondents, if they expect recovery
Don't know 9 10 to begin late in 2009 and into 2010, is which industries seem
best poised to recover and return to growth the fastest. This
851 to 900 0 1
question was asked as an “open end,” meaning that respondents
Over 900 0 0
were required to volunteer their views instead of being pre-
Don't know 33 34
sented with a fixed set of choices.

Economic Growth

When Will Growth Return?

Given the outlook that hedge fund managers have for key
indices, their optimism is somewhat less guarded about when
they expect to see positive growth for the U.S. economy. Look-
ing out through the end of 2011, 27 percent point to the fourth
quarter of this year as the key period in which growth will return.
While a third of respondents are optimistic that improvements
will be seen before the end of this year, six in 10 believe the U.S.
economy will not return to positive growth until 2010.

Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey | 7
Hedge fund managers point to a mainstay of the U.S. economy
– technology – as the industry best positioned to emerge in
the Obama Era as a leader in growth. Among respondents, 30
percent point to technology as their pick for having the best pros-
pects, followed by energy at 14 percent and the badly battered
financial services industry also showing good prospects.
Surprisingly, only 4 percent pointed to green initiatives, green
technology or alternative energy, perhaps in the belief that this
sector has already experienced significant growth during the
downturn and may plateau as the broader economy improves.
In your opinion, what industry has the best prospects
for growth?
Open End All
High tech / Computers/ Technology /Technology services/ IT 30%
Energy 14
Financial Services 14
Healthcare 10
Specific financial services: Banking / Hedge fund / Insurance, etc.
Green initiatives / Green technology / Alternative energy
Base materials/ materials/mining
Government/government related services
Industrial/ infrastructure/ construction/ heavy equipment
Pharmaceutical
Others 14
Government Performance
Much criticism has been leveled at the hedge fund industry by
the media, the general public and, in particular, by candidates
for office during the 2008 election cycle. The criticism continued
after the votes were counted, by those who won office and
the aides they appointed to key roles to manage the economic
recovery. Among the most interesting findings of the survey of
hedge fund managers came when, the study, the tables were
turned and respondents were asked their view of the perfor-
mance of senior government officials in the prior administration
and those who replaced them on Jan. 20, 2009.
Performance of Government Leaders and Institutions
The Federal Reserve and Chairman Ben Bernanke fared well in
the eyes of hedge fund managers as did the FDIC and Chair-
woman Sheila Bair. President Obama’s job approval rating was
somewhat lower, mirroring the overall job approval rating he has
received in recent polling among the general public.
Current Treasury Secretary Tim Geithner receives mixed reviews
to date, only somewhat better than those of his predecessor,
Hank Paulson. White House Budget Director Peter Orzsag, who
has received significant exposure in his post, received a signifi-
cantly lower appraisal than National Economic Council head Larry
Summers who, in some reports, has been portrayed as his rival.
How would you rate the job it is doing?
Showing 6-10 / 1-5 on a 1-10 Point Scale where
1 Means “Poor” and 10 Means “Excellent” All
The Federal Reserve 78%/23%
The FDIC (Federal Deposit Insurance Corporation) 78/21
5
Federal Reserve Chairman Ben Bernanke 75/27
4
FDIC Chairwoman Sheila Bair 67/26
4
President Barack Obama 61/41
4
The Treasury Department 61/41
4
Director of the National Economic Council Larry Summers 53/37
3
Treasury Secretary Tim Geithner 51/49
The TALF Program (Term Asset Backed Loan Facility) 48/51
The CFTC (Commodity Futures Trading Commission) 48/31
The TARP Program (Troubled Asset Relief Program) 46/52
Former Treasury Secretary Hank Paulson 45/55
The NFA (National Futures Association) 37/34
National White House Budget Director Peter Orszag 34/45
The SEC (Securities Exchange Commission) 26/76
Performance of the SEC
At the bottom of the scale, in the minds of hedge fund manag-
ers, is the Securities and Exchange Commission, which has
come under significant criticism for its delayed response to the
economic crisis. In the survey, another question was asked
about whether the SEC’s regulatory oversight authority was
sufficient, if underfunded, or whether it, or potentially another

8 | Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey
regulatory body, needed additional authority to provide the nec- Support/Opposition to Stimulus Package
essary level of safeguards that the markets require. Hedge fund
The reservations notwithstanding, a clear majority of hedge
managers showed, by a narrow majority, that they are willing, in
fund managers – by a margin of 58 percent to 42 percent – said
effect, to give the SEC another chance to provide the necessary
they support the $787 billon government stimulus package that
level of regulatory authority that the times demand.
was passed by Congress and signed by President Obama in
Do you believe the SEC's regulatory authority is sufficient Denver on Feb. 17.
and just needs to be funded or does the agency need
Did you support or oppose the government stimulus package
additional authority?
passed by Congress and signed by President Obama?
All
All
SEC's oversight is sufficient and needs to be funded 50%
Strongly supported 18%
Agency needs additional authority 42
Somewhat supported 40
Don't know 8
Somewhat opposed 23
Strongly opposed 20
Overall Appraisal of Government Response
Don't know 0
Beyond the perceived failings of the SEC, respondents were
asked what one word they would use to describe the federal Government Involvement
government’s performance in responding to the financial crisis.
Among the categories large enough to quantify, 45 percent While opinions are mixed and, in the end, somewhat approving
assigned generally positive words to describe government of both the need for the $787 billion stimulus package and the
actions and 36 percent chose generally negative words to performance-so-far of many individuals and institutions respon-
describe the effort. sible for addressing the financial crisis, hedge fund managers,
by a three-to-one margin, seem to draw the line at additional
What one word would you use to describe the Federal
government's performance in responding to the challenges regulation. They know regulation is coming, fear it, and question
in the U.S. financial markets? whether government or the private sector will ultimately be
Open End All responsible for disposing of the toxic assets that today litter the
balance sheets of financial services institutions.
Appropriate / Satisfactory / On-track 16%
Horrible / Ineffective / Pathetic 15
The Top Concern
Reckless / Desperate / Haphazard 15
Good / Great / Above average 13 In the survey of hedge fund managers, interviewers posed a
“polarity question” of respondents about government regulation,
Aggressive / Ambitious / Monumental 6
forcing them to pick between two extremes even if they may have
Necessary 4
preferred a more moderate view. While many people outside the
Adept / Constructive / Competent 3
financial services industry may believe that the government has a
Challenging / Trying 3
Chaos / Confusing 3 What concerns you more about additional regulation in the
financial markets?
Corrupt / Pork / ‘Spendy’ 3
Others 19 All
None / Don't Know / No Response 2 The government will go too far and stifle the market 75%
The government will not go far enough and problems will continue 24
Don't know 1

Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey | 9
long way to go to address the underlying issues facing the markets
and assert further control over its institutions, hedge fund managers
hold the opposite view, with 75 percent fearing that further regula-
tion will go too far and stifle the market’s recovery.
Self Regulation of Hedge Funds
When the mirror is turned on them, and hedge fund managers
are asked whether there should be more or less regulation of
their own industry, not surprisingly a plurality (43 percent) say
they feel there is the “right amount” of regulation of the hedge
fund industry. Interestingly, however, twice as many respon-
dents (37 percent to 18 percent) favored more regulation over
less regulation.
Do you feel that there should be more or less regulation of
hedge funds, or do you think there is currently the right amount?
All
More regulation 37%
Less regulation 18
Right amount 43
Don’t know 2
So, What Will Work?
Consistent with the gut-level response of 75 percent of hedge
fund managers that the government will go too far in its ef-
forts to regulate the market and, as a result, will stifle growth,
hedge fund managers were given the opportunity to offer their
own ideas for the one thing they would like to see the federal
government do to improve conditions in the financial markets.
Again, we grouped like responses to the open-ended question
and, overwhelmingly, the number one response was a form of
laissez-faire, with 21 percent saying that the best move would
be for government to employ less regulation, let capitalism work
or step out of the way.
Similar sentiments, specifically aimed at polices or particular
industries, echoed the belief that more government involvement
was a bad thing. A group representing 8 percent of responses
said that the government should spend less, stop printing
money or return to the gold standard, and a similar-sized group-
ing (7 percent) said the government should stop short of further
bailouts to the auto industry or the financial services industry.
10 | Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey
These ideas stood in contrast to those looking for more involvement:
14 percent – the second-highest scoring open end – said that more
regulation or oversight was a needed response while 4 percent
asked for the banking system to be fixed and for a heightened level
of transparency in that sector. Another 5 percent noted that action
was needed to assist homeowners facing foreclosure and fixes
were required to the mortgage crisis.
What one thing would you want the Federal government
do to improve conditions in the financial markets?
Open End All
Less regulation / Let capitalism work / Step out of the way 21%
Regulation and oversight / Assist struggling industries, but 14
regulate financial assistance/ Better oversight / Help struggling
companies but ensure oversight/ proper regulation
Cut tax rates / Don't raise taxes / Tax breaks for everyone 13
Spend less / Stop printing money / Take control of currency, get 8
rid of Federal Reserve and go back to gold standard
Don't bail out auto and banking industry / Limit bailout money / 7
Let bad banks fail but secure deposits
Assist homeowners facing foreclosure / Prevent 5
foreclosures / Solve the housing crisis/mortgage mess
Fix the banking system / Increase business relations with banks / 4
More disclosure/ transparency by financial institutions
Speak with confidence / Restore confidence / 4
Restore confidence in the financial system
Others 25
At the bottom of the list, garnering 4 percent of responses to
the one thing needed to bring health to the economy, is some-
thing President Obama, Larry Summers, Ben Bernanke and
Tim Geithner have attempted to do from the very first days of
the administration: that is, speak with confidence and work to
restore confidence in the financial system.
Who Will Ultimately Clean Up the Mess?
In the end, the respondents looked to the financial services com-
munity to respond with a market-based solution to the problems
facing the industry.
Ultimately, while 41 percent of hedge fund managers looked to the The Hits Funds are Taking
government to clean up the carnage of toxic assets, a majority – at
The result, not surprisingly, is that when asked in an open-ended
56 percent – felt that the task would yield a private sector solution.
question how their businesses have been affected by the market
Ultimately, do you see the public sector or the private sector turmoil, hedge fund managers report, first and foremost, a
cleaning up most of the toxic assets in the financial system today? decline in profits or decrease in returns. Hedge fund managers
All also reported in the survey that they see fewer investments
Public sector 41% they consider worth making or investors who are more hesitant
Private sector 56 to jump into new opportunities. In addition, the respondents

Don’t know 3 volunteer that redemptions have ticked up and it is harder to

raise new money into their funds.

In what ways has your firm been affected?

Impact of Economy on Hedge Funds
Open End All
With the market turmoil of 2008 and 2009, and many changes Declined profits / Decrease in returns/ Revenue / Difficult 29%
to generate positive returns
already instituted by the government, hedge fund managers read-
Fewer investments/ Investors / Investing more difficult / 22
ily acknowledge that conditions have had a broad impact on their
Investor hesitation
operations. Among those interviewed, almost all (96 percent)
Asset withdraws / Asset return way down / Difficult to 15
admitted to some impact and almost four in 10 said the impact raise assets
was significant. Redemptions / More redemption and less revenue / Fear 7
driven redemptions
To what degree has the current economy affected your
firm’s operations? It's harder to raise money/ It's lack of growth/ New funds 6
Created good profit opportunities/ Margins are strong/ We 4
All
were up 23% last year
Significantly 37%
Other 17
Somewhat 43
Not very much 16
Not at all 4
Don’t know 0

Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey | 11
The Effect on Risk Taking The Effect on Management Equity Plans

Given the stresses their funds have endured and the difficulty in A slightly higher percentage – but still a relatively low number
generating quality returns, has the environment caused hedge – report that they are considering revising their management
fund manager to dial back their risk tolerance? In our survey, equity plans.
the plurality – 44 percent – say no. But within the population of
those managers who have changed their risk appetite, signifi- Are losses causing your firm to reexamine management equity
cantly more hedge fund managers – by a margin of 40 percent plans and rework hurdle risks?
to 18 percent – have circled the wagons and reduced their risk All
appetite versus those managers who have increased it. Yes 12%
No 87
Since the economic downturn, how has your organization
changed its appetite for risk, if at all? Don’t know 1

All
Our risk appetite has increased a lot 2% The Effect on Liquidity Concerns
Our risk appetite has increased somewhat 16
Similarly, hedge fund managers are bullish about their liquidity
Our risk appetite has decreased somewhat 31
positions, with only 8 percent of respondents expressing
Our risk appetite has decreased a lot 7
concerns about their capital situation.
We maintain the same level of risk as we did previously 44
Don’t know 0 Do you have any liquidity concerns about your fund?
All
The Effect on Talent Retention Yes 8%
No 91
With lower returns (or even losses) reported with increasing
Don’t know 1
frequency, and news of funds returning capital to investors, a
reasonable question of hedge fund managers is whether they,
too, fear losing their valuable talent that can no longer count on The Effect on Investor Redemptions
compensation levels of prior years. Interestingly, less than 10 While hedge fund managers seem to brush off concerns about
percent of hedge fund managers in the survey report that they talent retention and liquidity, their fears manifest themselves
are revising, or considering revising, their incentive fee structure more clearly when the question turns to investor redemp-
to retain key talent, or reexamining management equity plans tions, the threat of customers removing the life blood from
and reworking hurdle risks post losses. hedge funds and limiting their options in the marketplace. In
the survey, 65 percent of hedge fund managers said investor
Is your firm currently revising or considering revising its
redemption is a concern, with one in five reporting that it is a
incentive fee structure to retain key talent?
“major concern.
All
Yes 8% Are investor redemptions a…
No 88
All
Don’t know 4
Major concern for you 21%
Minor concern for you 44
Not a concern at all 35
Don’t know 0

12 | Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey
The Effect on Lockup Periods
What one thing about your fund keeps you up at night?
The clear majority are not considering revising documents Open End All
to include lockup periods for new investors. The few that are
Risk / Increased volatility in markets / What the markets will do 21%
pursuing lockup periods say it has had little effect on ability
Government / Government interference / The Treasury, Federal 14
raise new capital. Reserve and Congress

Are you considering revising documents to include lockup Ability to raise funds/assets / Maintaining asset levels / 13
The endless search for more money
periods from new investors?
Investors / Lack of investors / Liquidity 10
All
Fraud 3
Yes, trying to get lockup periods 16%
Employment / Might not survive 3
No, not trying to get lockups 83
Momentum / Need for current positions to reverse / 3
Don’t know 1
The direction of the market
Other 23

Investment Mix Nothing / No one thing about my fund keeps me up at night 12

On average, respondents expect 68 percent of their assets will When asked about the threats they see to the hedge fund
be invested in securities. industry as a whole, the concern shifts from how the markets
will act to how the government will act. The survey asked a
What percentage of your assets do you expect to be invested closed-ended question to require respondents to pick from a
in securities?
pre-selected list. The previously noted concerns about lack
All
of inflows, loss of talent and inability to generate returns did
Mean 67.76% register among respondents but, by far, the biggest threat that
hedge fund managers expressed about their industry is onerous
government regulation.
Ongoing Concerns About Their Own Business and the Hedge
Fund Industry in General What is the biggest threat to the hedge fund industry?
Second
Although the data suggest that some “green shoots” of Top Two Biggest Biggest
optimism creeping into the outlook of hedge fund managers, Onerous government regulation 48% 38% 10%
there are still many issues which keep “them up at night,” and
Lack of willing investors 32 16 16
so we asked that specific question and allowed an open-ended
Overall industry reputation harm 25 12 13
response. When focused purely on their own companies and
Lack of access to capital 23 9 14
what is keeping them up at night, most are worried about con-
Higher taxes 18 4 14
tinued volatility in the markets, but they also note the burdens
Lack of transparency in the markets 15 7 8
of increased government regulation and their strained ability to
maintain a steady stream of inflows into their funds. Inability to provide steady returns 9 6 3
to clients
Inability to price or trade certain 6 0 6
illiquid assets
Loss of talent in the industry 3 0 3
Onerous reporting standards 5 2 3
Fraud / Another Bernie Madoff 5 2 3
Other 13 5 8
Don’t Know / No Response 1 0 1

Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey | 13
When combined with the first and second biggest threats that
hedge fund managers perceive about their industry, a clear pattern
emerges: government regulation first, lack of new investors and
redemptions second and reputational harm to the industry third.
While not ignoring the wide range of evident threats to their
businesses and the hedge fund industry as a whole, hedge
fund managers as a group, a nearly two to one margin, express
optimism that the current economic environment offers more
investment opportunities than challenges.
As a fund manager, do you feel that the current economic
environment presents…
All
More investment opportunities 61%
More investment challenges 35
Don’t know 4 of hedge fund managers speculated that they would actually
In an earlier part of the survey, hedge fund managers expressed
a desire for a process and more rules in place to govern a market
for toxic assets. When we asked if they believe that such a
market can develop, 80 percent said that they thought there can
be an organized market for illiquid assets like like collateralized
debt obligations and mortgage-backed securities.
Do you think there can be an organized market for illiquid
assets like CDOs and MBSs in the future?
All
Yes, there can be 80%
No, there cannot be 17
Don’t know 3
It may, however, be left to another fund to capitalize on this
potential marketplace. In the survey, only one third (33 percent)
purchase illiquid assets in the near future.

Future Market Opportunities If there was an organized market, how likely are you to buy
illiquid assets like CDOs or MBSs in the near future?
So where do those opportunities lie? Looking forward, over half All
of respondents would consider a seeding fund as an avenue to Very likely 9%
assist fund growth. Somewhat likely 24
Not very likely 27
Would you consider being introduced to a seeding fund in Not at all likely 33
order to assist you in growing your fund in these trying times?
Don’t know 7
All
Yes 54% Assuming a regulated derivative market is put in place as one
No 40 way to restore the economy to health, three in four hedge fund
Don’t know 6 managers support mandating minimum reserve requirements
for them.

Assuming a regulated derivative market, would you support or

oppose requiring minimum reserve levels for all hedge funds?
All
Strongly support 33%
Somewhat support 41
Somewhat oppose 12
Strongly oppose 9
Don’t know 5

14 | Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey
Participating Demographics

General Long-Short Equity, Fund of Funds and Managed Futures What is the approximate percentage of your investment
portfolio, based on U.S. dollar value that is Non-U.S. based:
are the top three investment strategies being used.
All
Which of the following best describes your investment strategy?
0% 27%
All
1-10% 18
General Long- Short Equity 30%
11-20% 9
Fund of Funds 15
21-30% 10
Managed futures 10
31-40% 6
Market Neutral 9
41-50% 11
Multi-strategy 7
51-60% 2
Emerging Markets 6
61-70% 3
Fixed Income 5
71-80% 1
Long Only 5
81-90% 4
Global 4
91-99% 1
Macro 3
100% 5
Opportunistic 2
Don’t know 4
PIPE’s 2
Distressed 1 And how long have you been working in the industry?
Merger Arbitrage 1 All
Options Strategies 0 1 to 2 years 2%

Short selling 0 3-5 years 15

Statistical Arbitrage 0 6-8 years 14

Other 0 9-11 years 18

Don’t Know / No Response 1 12-15 years 20

16-20 years 14
What is the approximate percentage of your investment
21-25 years 9
portfolio, based on U.S. dollar value that is U.S. based:
26-30 years 8
All
31+ years 2
0% 4%
Don’t know 0
1-10% 3
11-20% 3
Methodology
21-30% 2
31-40% 3 Penn, Schoen & Berland Associates conducted 102 telephone
41-50% 7 interviews among hedge fund portfolio managers and senior
51-60% 5 executives. Each interview took approximately 20 minutes to
61-70% 7 complete and were conducted by PSB’s Corporate Research
71-80% 6 Group, elite interviewers who specialize in eliciting the views of

81-90% 16
senior-level executives. The study was conducted from May 20
through June 4, 2009. All respondents were pre-screened and
91-99% 6
were required to be at, or above, the portfolio manager level,
100% 35
and currently work for a hedge fund. The margin of error for this
Don’t know 4
study is ± 9.7 percent.

Opinions of the Hedge Fund Community: Research Conducted Exclusively by RSM McGladrey | 15
With more than 50 years of experience serving the financial
services community, RSM McGladrey and McGladrey & Pullen’s
hedge funds/alternative investment practice works with more
than 1,600 hedge funds/investment partnerships, fund of funds,
investment advisors, broker-dealers and futures commission
merchants, including more than 450 private equity groups.
As a Top Five of U.S. accounting and business advisory firm,
we specialize in addressing the complex operational, financial
reporting and compliance issues facing the industry. Some of
the services we provide include financial statement audit, tax
structuring and risk management. This commitment to your
success is available through practice hubs in New York, Chicago,
Dallas, Denver, Washington, D.C., and the Cayman Islands.

For more information please contact:

New York

Kislay (Sal) Shah, CPA

Managing Director
Financial Services Industry Practice Group
1185 Avenue of the Americas
New York, NY 10036
Email: Kislay.Shah@rsmi.com
Phone: (212) 372-1201

Chicago

Simon Lesser, CPA

Managing Director
Financial Services Industry Practice Group
1 South Wacker Drive, Suite 500
Chicago, IL 60606
Email: Simon.Lesser@rsmi.com
Phone: (312) 634-4604

RSM McGladrey, Inc. and McGladrey & Pullen LLP have an alternative practice structure. Though
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Pullen serve clients’ global business needs through their membership in RSM International, the
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