By Niki Natarajan
"When you change the
way you look at things, the things you look at change," is the
ancient Tao observation, as paraphrased by Dr Wayne Dyer. It
could have just as easily been written to explain the shift in
paradigm that is finally happening in hedge funds as it could
to describe the optical illusion illustrated.
From the point of view of most hedge fund managers, they are
simply managing money, actively, differently, but they are
still asset managers. Somewhere this idea got lost in
translation and most investors, except those truly enlightened,
have been buying hedge funds as 'alternatives' for the last 10
As such these alternatives had their 5% or so allocation in
institutional portfolios - and that, at least until the
financial crisis, was that. Now that the world is emerging from
the global fog and the debris has been assessed, some investors
are saying alternatives are not alternatives - because in the
end they were all correlated.
Are they awakening at last? Is there enlightenment in asset
management? Investors now have a chance to change the way they
look at things and perhaps actually change the fortunes of
their investment portfolios. Equities, when managed in a
long/short strategy or in any other style, are still equities.
Knowing this is called awareness. And awareness is the first
step towards transformation.
Customisation is this awareness in action. Some investors
are now taking a look at their portfolios and deciding where
they really want to go and over what period of time. They are
starting to break down their alternative portfolios into the
component parts: equity-based strategies; fixed income-based
strategies; and the truly uncorrelated strategies, such as
commodities and other real assets, have become the alternative
This has been discussed at length over the last 10 years,
but it seems that the correlations of 2008 and 2009 have now
made this a real issue rather than a hedge fund marketing
Indeed, K2 Advisers - sub-adviser to the Dexion Equity
Alternative fund - has revisited this paradigm shift. In its
April investor letter, K2 likens this shift to "an advance in
technology", such as Johann Gutenberg's invention of the
movable type printing press.
Hedge funds are now being seen as the advanced
money-management tool they always were. In fact, such is the
demand for pure-play products that Dexion Equity with K2 have
re-jigged the fund's mandate to be a concentrated US equity
fund for just this reason (page 32).
Hedge fund assets are growing again, but the reason hordes
of investors have not stampeded into hedge funds to boost their
actively managed equity allocations is down to looking at this
industry through old glasses.
They argue that the performance of the hedge fund industry,
which is only up 1.74% for the year to date according to the
HedgeFund Intelligence Composite, is the reason they are
stalling. While I am not advocating the acceptance of
lacklustre performance of any kind, what if the expectation
hurdle needs to be reset in this new Aquarian age?
Prior to the crisis, investors were sold and expected
10%-plus returns a year from hedge funds - and this belief in
outsized returns is why more investors bought hedge funds.
Despite the "disappointing returns", this view of hedge funds
as the performance Holy Grail still prevails in the minds of
the misinformed. So no wonder investors are disappointed.
With most end-investors and their consultants managing
future liabilities based on assumptions, one has to hope that
the assumptions are correct. But, as everyone knows, "to assume
is to make an ass of u and me".
So what if the real return is, for example, half of what
pension funds are assuming in this near-zero interest rate
environment? Compared with the returns of Japanese pensions
after two decades of a similar environment, year-to-date hedge
fund returns of 1.74% are maybe not looking too bad after