By Nick Evans
Attending the InvestHedge Forum this month was in some
senses a tonic for anyone who has been a bit dispirited by the
generally - although by no means universally - rather
pedestrian hedge fund performance of late.
Seen from the perspective of investors, hedge funds are
basically doing OK. That was the message from InvestHedge's
well-attended annual get-together, which drew a capacity crowd
of 500 people from all sides of the hedge fund investor
They could be doing better, for sure. But they could just as
easily be doing worse - in what remains a very difficult and
potentially very dangerous investing environment.
And, for the most part, they are doing what most investors
want them to do - which is to reduce volatility and/or risk and
to protect on the downside, while also providing portfolio
diversification and participation in rallies such as that seen
over the past few months.
There was little sign of panic, or even particularly of
disappointment, among most investors - certainly on the
institutional side. And the general tone of the event was, by
and large, both reassuring and reasonably encouraging.
But it was also a little unsettling. For it made plain a
very profound difference in the ways that the newly-dominant
institutional investor base looks at hedge fund investing, and
in the things that these newer types of investors want and
expect from hedge fund managers.
And it is not at all clear that hedge fund managers
themselves see fully the extent to which the world has changed
- in terms of how these types of investors look at things
generally; how they look at hedge fund performance (both
individually and collectively); and how they go about assessing
whether hedge funds are performing the role that they need them
to perform in terms of their overall investment portfolio
strategies and objectives.
It is profoundly wrong to view hedge funds as some kind of
homogeneous mass. But, by the same token, it is equally
misguided to see investors (and, most of all, institutional
investors) as all being somehow cut from the same cloth
If anything, the investors are even more diverse than the
managers - in terms of what they are trying to achieve; in the
role that they perceive for hedge funds in their broader
portfolios; in the types of managers and funds and strategies
that either appeal or do not appeal to them; and in the types
of results that will ultimately convince them that they were
either right or wrong to allocate assets to hedge funds in the
For most investors hedge funds are just one tool in a fairly
well-stocked kit-bag. That is true for the hedge fund industry
as a whole. And it is all the more true at the level of the
individual hedge fund manager or the individual fund
Whether they choose to invest via consultants, or via funds
of funds, via managed accounts or via direct allocations to
underlying hedge funds is not really the issue - although
clearly there is a battle royal brewing between investment
consultants and fund of fund intermediaries to gain market
share in the fashionable new 'investor advisory' space, with
some potentially ugly conflicts of interest looming on the
The main issue -for most investors - is a rather simpler
one. Are my hedge fund investments doing what I, individually,
want them to do? Am I investing with the right kinds of funds -
for me? And am I paying the right price for what I want and
expect them to do?
On current showing, the evidence is mixed - at best - on
both a short-term and a relatively longer-term horizon. But,
just as many managers concede that they are unlikely to produce
in the current economic environment the kinds of returns that
they were able to produce in the past, it is surely not
unreasonable to expect many investors to say that they are now
reluctant to pay the kinds of fees that they might have been
prepared to pay in the past.
As far as funds of funds go, that battle has already been
lost. The double-layering of fees at 1/10 on top of 2/20 is a
thing of the past. Too many funds of funds simply proved unable
to deliver the necessary added value.
Quite what the new price for hedge fund intermediation
should now be - whether in terms of consultancy or advisory
work, in terms of direct hedge fund placement, or in terms of
either customised or commingled multi-manager portfolios - is
now a pressing question.
But it will not end just at the intermediary level. It is a
debate that is moving centre stage with hedge funds too - with
Caxton becoming the latest major firm to cut its fees.
So performance may be an issue. But it is not the principal
one - and the evidence so far is that investors are showing
more patience on that front than many managers might have been
entitled to expect. The big issue is price. On that score,
investors are not so happy.