By Susan Barreto
As we come up to the mid-year point for 2012, an increasing
number of investors are beginning to wonder the same thing
– are hedge funds a short-term gamble that are no
longer worth the hassle?
It has been a hard pill for trustees and CIOs to swallow as
the majority of hedge fund portfolios seem to still be in the
red, having yet to bounce back from 2011 losses. The
InvestHedge Composite index is up only 2.28% for the
year-to-date up to the end of April.
This month we see investors reconsidering their past
portfolio choices, and many are more willing to dabble with
single managers in certain strategies aiming to boost returns
and lower fees than were traditionally charged by funds of
Funds of funds are squarely in the firing line. For
instance, at Dorset Pension Fund in the UK, the plan is to
conduct a full review this year of its funds of hedge funds
(page 7). Gottex and IAM were highlighted as having performed
below expectations: over the past three years, the
double-leveraged Gottex fund produced annualised returns of
5.88%, while IAM generated annualised returns of 1.75%.
But over five years the industry’s picture is
better. Does this mean patience over the longer term or has the
hedge fund tide turned for good? Trustees at the Avon Pension
Fund (see page 6) are concerned over the returns of Man
Investments, which recently struck a merger deal with FRM (page
29). With an absolute return of -5.8%, Man’s
bespoke portfolio is the worst-performing of the four funds of
funds in the portfolio.
Direct hedge fund programmes are hardly immune from this
underperformance trend. The California Public
Employees’ Retirement System hedge fund programme
is still down for the year, with a loss of 1.5% for the year
ended 31 March 2012 (page 7).
Meanwhile, Colorado Fire & Police Pension Association is
looking to boost returns via single-manager hedge fund
selection with the help of Albourne Partners (page 10). Funds
of funds still play an active role in the portfolio, but for
staffer Austin Cooley FoHFs in general have a very high
standard to live up to justify their fees.
Some are giving up on hedge funds altogether this year. The
$17 billion Philips Pensioenfond in the Netherlands has decided
to withdraw from hedge funds as an asset class as part of a
strategic reallocation (page 8), and if one only looks at the
three-year picture from 2008, it is easy to see why.
Chronic underperformance is not only affecting pension
trustees, but endowments are also struggling to justify their
hedge fund programmes when this happens, as will be seen in
more detail in next month’s US endowment
Fees are a big part of the roll of the dice. Trustees are
wondering why they should pay more than a 1% management fee,
when multi billion-dollar hedge funds now have the advantage of
scale in running their business. Performance fees may not be
applicable in this down market, but management fees can add up.
In fact, a recent press report told of trustees of one large US
public pension fund questioning $38 million in hedge fund fees
being paid for a portfolio which sustained losses in 2011 and
Patience among trustees is waning. Funds of funds seem to be
the early casualties, but single-manager hedge funds are
definitely not immune from scrutiny. The question is of course:
when do you pull the trigger? If institutions fail to see a
healthy gain over the cycle, how long will they be willing to
This may also ultimately affect the businesses of specialist
consultants such as Albourne Partners, Aksia and Cliffwater.
The stakes are high after all, as most pension funds are under
water when it comes to long-term funding. But the stakes could
be even higher for a segment of the asset management industry
that has prided itself on separating its brand of alpha from
long-only beta managers.
Whether or not the end of 2012 will spell the end of the
hedge fund road as we know it all rides on the returns of the
next few months.