By Susan Barreto
The hedge fund identity
crisis still seems to be haunting an industry that is still
desperately looking for cash. For end investors this has meant
a parade of hedge fund strategies masquerading in a variety of
costumes - including long-only, in managed accounts,
multi-strategy and even customised products.
This is apparent in the InvestHedge monthly mandate
tables that saw a number of hedge funds recently win mandates
as dressed up as real-return or absolute return managers.
Some of the largest single manager mandates were awarded to
groups such as Pimco, BGI/BlackRock, and Bridgewater in
portfolios that are packaged under a variety of hedge fund like
At the heart of the matter isn't what managers choose to
call themselves, but whether or not trustees actually know the
difference between a hedge fund, a real return or an absolute
return manager; and does it matter?
There are a number of sophisticated investors who say hedge
funds are not an asset class but rather an investment
management approach that can be applied across a portfolio.
This may be true, but in its application there have been some
At public pensions, for example, there has been a move into
direct hedge fund programmes augmented by real return or GTAA
offerings that whether they know it or not are also hedge
The politics of hedge fund investing has created new
nomenclature among US public pension funds, plus the situation
is not helped when consultants such as Mercer widen the hedge
fund definition (see profile page 22).
In 2007, the $100 billion Texas Teachers Retirement System
lost a battle with the state legislature to double the
allocation to hedge funds. This means that to get hedge funds
through the door they go by two different names - hedge funds
and absolute return.
Both housed under alternative investments, hedge funds and
absolute return strategies do share similar traits in the Texas
According to the pension system's annual report, a hedge
fund is a private commingled investment vehicle with the
general characteristics as set forth in Texas Government Code,
Section 825.3012. By state law, Texas Teachers are allowed to
invest up to 5% in hedge funds.
The absolute return portfolio in Texas is a broad category
of investments that includes all assets that have "a high
probability of generating a positive absolute return regardless
of market conditions over a one to three year period". The
absolute return portfolio also includes hedge funds. In other
words the absolute return portfolio can be home to additional
hedge fund allocations that can be made outside of the 5%
Random "politically correct" labels aside, hedge funds are
defined broadly as a set of strategies that often include
futures, options, leverage and shorting techniques and are
structured as a private investment offering under set
For pensions, new asset allocation strategies coming to the
fore could create more practical problems with improper
labelling. Investment philosophies - such as liability driven
investing or risk parity - are dependent on investors analysing
risk properly and much of that is dependent on calling a hedge
fund a hedge fund in order to decide where leverage is safely
applied. Is this a situation of don't ask, don't tell?
Lastly, investors need to know whether other investors are
allocating to their same managers under the hedge fund or some
other random label. Why? This is because down the road a
manager's portfolio could grow rapidly due to a new label and
this impacts all investors' future liquidity and capacity.
Managers may be dealing with an identity crisis or could
just be enjoying the freedom of being considered for a variety
of mandates in all the ambiguity but at the end of this costume
ball it is up to investors to wisely define which manager they
want to dance with in this new era of global markets.