Some are looking at hedge funds from an overall portfolio perspective, says Fridman, to provide different types of risk and return characteristics and reduce the volatility of the entire book.
Increasingly, institutional investors are looking for customised approaches both through traditional asset management routes, but also through hedge fund allocations.
Sally Bridgeland, senior adviser at Avida International agrees those with significant allocations will also have been reshaping the rest of their portfolios, and thinking to the future.
“Pension funds are becoming more conscious about how they use their time and resources as the funds mature,” says Bridgeland. “Hedge funds may not fit with their preferred governance models including how they use their in-house resources, external asset managers and investment consultants.
“To cut out the second layer of fees and build a tailor-made portfolio requires an assessment of the large range of funds available and strong levels of understanding.”
I AM SPARTACUS!
This brings us to the nub of the problem with hedge funds. They are compared in terms of performance and fees with traditional asset managers, yet it is their techniques which set them apart from tradition.
However, that which has set them apart is now in fact bringing them together as convergence is greatly influencing the asset management arena.
Traditional asset managers are now using some of the techniques more commonly found in the hedge fund toolbox, says Fridman and likewise, some hedge fund organisations are taking on long-only mandates to accommodate institutional investors.
“This convergence is blurring the lines between the two groups,” says Fridman, “therefore, some investors pay more attention to the risk factors of the options available when evaluating opportunities across different asset classes.
“If hedge funds manage a strategy similar to that of a long-only manager, they may compete for the same mandate or allocation.”
THE COST VS VALUE DEBATE
Outflows tend to happen from strategies that are underperforming. Global macro has had a bloody time of it over the past year, and until June, CTA performance was poor and redemptions were high.
This necessarily brings us back to the question of fees, because the perennial argument is that nobody worries about fees if the performance is good enough.
“Many funds chose – and consultants recommended – funds of hedge funds as a way to gain experience and an initial exposure to hedge funds,” says Bridgeland. She says pension funds should be reassessing their positions as the hedge fund industry has changed so much in the past five years since the crash.
“The fees are unattractive when the general outlook for returns is lower, particularly for funds of hedge funds.”
Though a lot of institutions might consider funds of funds and would prefer to go direct, that may not be practical, says Patrick Ghali, managing partner at Sussex Partners.
“Direct requires CIO and analysts to be used, so you really need to know you can do a better job in-house.
“If you can’t commit the resources, you may find yourself locked-in as you can’t fire them on a three or six-month basis.”
Much of the talk about performance is emotionally driven and people talk in terms of the average, says Ghali, and that too is an overly simplistic view.
Some funds – like CalPERS – may simply be too large for allocations to hedge funds to really work for them.
Others who have experienced consistently poor performance must look to themselves and consider if their selection process is fit for purpose.
“There’s no point buying what everyone else is buying – that is an index or careerist strategy,” adds Ghali.
But people still ‘don’t get fired for buying IBM’ and there are good reasons for using hedge funds in different ways as long as they apply to your circumstances. It is not the vehicle people should focus on, but the return structure, he says.
New fee models are also better aligning the objectives of managers with investors.
“A high watermark or clawback is not a bad idea and should ensure the managers don’t get rich as investors lose money,” adds Ghali. If aligned, it’s purely a commercial conversation – if it can be replicated elsewhere, it should be cheap and if not, you need to pay for uniqueness of that is what you seek.
“Investors should always question the fees they are paying and vote with their feet,” says Nicolas Campiche, CEO, Pictet Alternative Investments. He says institutions should not be “allocating blindly” to what certain parts of the market consider “safe haven institutional hedge funds”.
Fees are a burden on returns, but perhaps not so much as bad performance and consultants are partly to blame for the maintenance of high fees says Campiche.
Consultants come in for a lot of criticism in the hedge fund arena. As intermediaries, they should be absolutely certain the scheme is getting what it expects and that underperformance goes unrewarded.
Comments