By Niki Natarajan
As Sebastian Vettel sped across the finishing line to win
the Monaco Grand Prix last week, I realised that the hedge fund
industry had bifurcated into Fords and Ferraris. As with the
high octane hedge funds of old, Formula 1 winners may sometimes
scoop a win simply because another has crashed. AIMA's Investor
Steering Committee recent Guide To Institutional Investors'
Views and Preferences Regarding Hedge Fund Operational
Infrastructures, has offered a new manual on how to build a
Ford and avoid crashes (page 26), but no mention of how to
enhance performance - still, of course, the central issue for
The assumption has always been that investors buy hedge
funds for performance, but it seems more true to say that the
majority of them are simply using hedge funds as a way to
reduce the equity risk in their portfolios. For these
investors, hedge funds are not really an alternative investment
anymore; they are a business that manages money differently. As
Kathryn Graham, a keynote at the upcoming InvestHedge Forum
(page 20), said at the recent EuroHedge event in Paris: "The
industry needs to look more like a proper business, with proper
boards, good governance and directors that know what they are
This is exactly as it should be for those manufacturing
Fords with their low volatility and 'safe' returns. There seems
to be a problem in the industry right now, however, as some
investors still believe they can have Ferrari performance with
a Ford chassis. But in reality of course, unless one chips the
engine (and adds leverage) there is going to be continued
''disappointment' in hedge fund performance.
Many investors are now buying these operationally sanitised
funds to build constrained customised portfolios, but what the
majority are doing is sacrificing performance. "Every time you
constrain a manager you are making it more difficult for that
manager to earn superior returns," said Mark Eaker of Sire
Management Corporation in our interview last month.
If performance is not the end game, then technically this
should not be a problem; but right now the lacklustre
performance of the indices is creating a sustainability issue.
Dampened, institutionalised performance has created a Catch 22.
With performance no longer the goal, the hedge fund indices are
suffering. Most funds of funds do not report the performance of
their customised accounts and even if they did the lower
returns would only serve to dampen the FoHF industry's returns
This lower return environment in the FoHF space means
investors are less likely buy funds of funds -which is in turn
fuelling a stagnation in the allocations to single managers
generally, but more importantly to the managers of tomorrow as
well. Institutional seeding, such as APG's IMQubator is one
answer to this (page 37), but even many seeded managers often
rely on savvy funds of funds as investors.
The $500 million expected to flow out of ABN Amro's private
bank is a small drop in the FoHF ocean (page 35); but it seems
that the tide is turning. Looking at this month's Mandate table
shows that $580 million was allocated to FoHFs and there were a
number of new mandates that also announced plans to invest in
FoHFs (page 14).
According to Dariush Aryeh of Fundana (page 32) and
Jean-Louis Juchault (page 34) experienced funds of funds are
the only viable model to really access manager alpha - and
discover the Ferraris of tomorrow. And it turns out that like
in any cycle, one always ends up back to the beginning, which
in this case sees the return of private banks, such as Julius
Baer, who know how to drive fast, safely. The FoHFs, such as
Fundana, on their highest conviction funds of funds lists,
really know how to look inside the hood of the hedge fund
engine to rev up performance.