By Nick Evans
Lansdowne founder Sir Paul Ruddock put it best of all.
Speaking at the annual EuroHedge Summit in Paris in late April,
he cut to the quick on the issue that dominated most of the
discussions and debates over the two days: performance.
"The hedge fund industry is like a luxury brand," he said.
"We charge a premium price and that means that you have to
deliver a premium product. We need to deliver."
Ruddock’s comment encapsulates the growing
sense of unease among managers as well as investors that hedge
funds are not doing what they are supposed to do – or,
more to the point, are not doing what their investors want (or
expect) them to be doing.
The further away it gets, the worse 2011 seems for the
industry as a whole – worse, in many ways, than 2008.
Yes, markets were difficult. But they were not impossible. And
these kinds of skittish and politics-driven market conditions
could well be the norm for a while, with the events of the last
few weeks giving every sign that 2012 could be a repeat of
What is dismaying investors (and many managers too) about
recent performance – in a period when very many funds
have been underperforming the markets, and at a time when they
should quite reasonably have been expected to outperform
– is that hedge funds do not appear to be providing
any of the benefits that they are commonly assumed to
Correlations have been at an all-time high – at a
time when investors really need them to be as low as possible.
Worse, many funds have appeared to be correlated mainly on the
downside – exposing investors to the risk-off moments
of downward market direction without being able to deliver the
upside in the corresponding risk-on periods.
The overall volatility of returns may be lower than the
underlying markets, which is some comfort and value to
investors. But that is scant consolation for the fact that
absolute returns have been minimal – or, in many
Nor does it compensate for the fact that hedge funds in
general have seemed for some time now to be providing
negligible diversification benefits when viewed in the context
of investors’ overall portfolios and needs.
While it is perfectly sensible and right for AIMA and others
to draw attention to the clear long-term outperformance of
hedge funds over the past two decades, that is unlikely to make
those investors who have only been allocating to hedge funds in
the last few years feel any better about the fact that they
have suffered losses in two of the last four years.
So far investors have broadly kept faith. Overall
redemptions have been low and there is growing evidence that
the more institutional nature of the investor base these days
has indeed provided those managers that can attract
institutional capital with a stickier, more patient and
longer-term capital base.
But the fact that there has not been another sudden rush for
the exits does not mean that investors are satisfied. Far from
it. There is clear disappointment among all types of investors.
And there is mounting concern that hedge funds are not going to
help them in the ways they had hoped – whether in
terms of reduced volatility, lack of correlation, portfolio
diversification or protection against the tail risk events that
are of such paramount concern to all investors at such a
challenging and dangerous time.
Of course there are valid questions as to whether the huge
changes in the nature of the hedge fund investor base over the
past five years or so have fundamentally changed the industry
in terms of the increasingly divergent interests of managers
Do investors know what they want from managers? Do managers
know what investors want? What is fair to expect? What is it
fair to charge? Is it becoming impossible for managers to run
money simultaneously for different types of investors that want
different things? Is the bifurcation of the industry that some
people have long predicted between an institutional sector and
a non-institutional sector starting to become inevitable?
But that is all a debate for another day. Right now, in an
environment full of risk and fear (and opportunity), investors
need hedge fund managers to prove to them that they were right
to give them their money – and that both their
investment and their trust are justified.