By Susan Barreto, deputy editor
The global credit crisis has turned traditional economics on
its head. As new strategies are being promoted, many investors
are at sea in terms of knowing whether buying them will instill
calm or rock the institutional investor boat more.
Despite the gloom, there seem to be plenty of fund launches
and additional capacity with experienced blue-chip hedge fund
managers. But investors are anxious to see whether or not these
new offerings fit their long-term investment strategy - and in
many cases are employing asset liability studies to gain a
snapshot of their portfolio.
Once the traditional investment consultant has signed off
the study and approved hedge funds, many pension funds are
starting to turn to specialist groups such as such as Albourne
and Aksia before investing serious sums. There seems to be
recognition that even though hedge funds are only a small
portion of the portfolio, their effect can be mighty when it
comes to keeping the boat on an even keel.
Until now, most investors have accepted what they have been
given. But now, institutions, mainly in the US, are pondering
whether it's time to stand up in the rowing boat and reconsider
fees and lock-ups.
What is clear is that the bargain basement mentality is not
an appropriate substitute for an investment philosophy. Perhaps
counter-intuitively for large investors used to heavy discounts
for bulk assets, now is the time to pay for expertise in hedge
funds; the kind of expertise that comes with knowing more than
just a handful of industry superstars.
Most investors may still demand lower fees and greater
liquidity, but looking for these traits alone in a manager can
lead a portfolio into uncharted waters. Funds with great
liquidity terms suffered the most when the markets tanked.
Specialist consultants offer a solid middle ground to
investors. It might not be cheap, but it is certainly better
than the risk of getting it wrong.
Again, for investors serious about strategic market plays,
individual hedge fund holdings chosen by a third-party
consultant might smooth some of the waves, while funds of hedge
funds still make sense for investors that want access to a
broad range of strategies. But if Madoff has taught the
institutional investor community anything, determining
fiduciary responsibility is also important. At the end of the
day, trustees need to abdicate their oversight of the portfolio
to experts willing to take responsibility for their own
It seems that investors really wanting to rock the boat are
spending long hours in their lawyer's office - but although
their intentions are good, they have little to gain from suing
their consultant, per the lawsuit filed against NEPC by the
Town of Fairfield (see page 11).
In the case of one prominent hedge fund, some investors may
have had advanced intelligence of a strategy's demise and put
in redemption requests ahead of other investors that may now
have to write-off their entire investment. In these cases no
one wins, but the outcome of clawback provisions in the case of
Bayou and Madoff pit investor against investor thereby
capsizing the boat with all on board.
So should investors head for calmer waters and be willing to
pay for advice - or be willing to rock the boat in rough seas?
The question can only be answered according to the faith
investors can put in their due diligence, investment process
and long-term investment philosophy. When investors are
resorting to tactics to sink individual ships, there is little
chance for new, investor-friendly hedge fund models to