Madison Street Capital’s President Charles Botchway Thinks Hedge Fund Investors Are Expecting Too Much

Charles Botchway is one of the co-founders of Chicago-based Madison Street Capital. Madison Street Capital focuses on small and medium size mergers and acquisitions around the world. Botchway and COO Anthony Marsala have won numerous awards in the financial industry, so people listen when the men talk about investment banking. Botchway and Marsala had an excellent year in 2015. Madison Street Capital closed 42 hedge fund deals in 2015 compared to 32 transactions in 2014. The volume of the 2015 transactions was 27 percent higher than 2014. Botchway and Marsala think 2016 will be a better year than 2015, but many hedge fund investors are expecting to make a 9 percent return on their investments, and that may be too optimistic.

Mr. Botchway thinks smaller hedge fund managers are trying to attract new capital, and they are functioning below projected portfolio capacity levels. Overall, hedge fund managers are experiencing higher operational costs, and there is a lot of pressure to reduce management fees. These issues are forcing all hedge fund managers to consider strategic alternatives. But Madison Street Capital is still performing as expected and management fees have not been impacted so far.

But a survey of 400 investors in other funds, expects at least a 9 percent net return on their investment, but in 2014 there was a net decline of 2 percent when all hedge fund activity was analyzed, according to data tracker eVestment. The survey also showed that 5 percent of hedge fund investors expect an 18 percent return, and 32 percent expect a return between 15 and 17 percent. There is a dramatic difference between what hedge fund investors expect and what hedge funds are delivering, and that mismatch is creating uneasiness in the industry. Many hedge fund managers have lower their fees, and they have offered their investors other perks to compensate for the difference in net returns.Some hedge fund managers are offering investors alternative mutual funds in order to tap into a bigger investor pool.

Hedge fund managers are feeling the pressure and shift in the industry. The old hedge fund performances that beat stock market returns, and provided a hedge against stock market downturns are not there anymore. The old fee base was 2 percent of assets managed and a 20 percent performance fee on top on that. That model is fading fast.

The Madison Street Capital hedge fund and other hedge funds like Element Capital Management and Perceptive Advisors are still outperforming the industry in terms of returns. But there were some big losers last year. Pershing Square Capital’s returns dropped 20 percent last year, and Greenlight Capital also dropped 20 percent. No one is sure how the hedge fund industry will do in 2016, but Botchway is still optimistic based on the assets he manages.

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