How to win the hedge fund investor Olympics

Thu Sep 6, 2012

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The art of hedge fund investing is to realise that it is not a static game


By Niki Natarajan

"Olympism seeks to create a way of life based on the joy of effort, the educational value of a good example and respect for universal fundamental ethical principles," according to the Olympic Charter originally set out by Pierre de Coubertin – father of the modern-day Olympics.

With the Paralympics in full swing, and most of soggy wet London still elated from the Olympics itself, it is hard not to be inspired to perform and excel to the best of one’s capabilities.

But it is the pursuit of performance excellence that many seem to have forgotten when it comes to investing their time, money and energy in anything, especially hedge funds. Much like the 'real’ world of couch-based online addicts, investing seems to have turned into a passive sport with low rewards, leading to little incentive to perform and win.

Is this really the way to achieve performance mastery? Olympians would probably say no. To them, de Coubertin’s words resonate like a mantra: "Olympism is not a system, it is a state of mind." I would argue that this is true also for all great hedge fund investors.

As the hedge fund investor Olympians prepare for their very own opening ceremony, to be held at The Great Court of the British Museum in London on 3 October, a new mood seems to be emerging between the different teams: one that is more collaborative than combative.

Until now, funds of funds have been angered as they saw investment consultants stealing their medals, in a match with no umpires to preside over 'fair play’. Some, like Grosvenor Capital Management and Blackstone Alternative Asset Management, have retaliated and adopted tactics such as those played at the Texas Permanent School Fund, where they are offering their arguably better research, due diligence and monitoring and reporting services for free (or nearly).

There is evidence, however, that a new team spirit is in the air. After a decade of dependency, hedge fund investors are ready to compete on their own. But what many have learned in a very short space of time is that to excel all good athletes have a coach or trainer – which is why some of the larger funds in the US are looking to return to some form of partnership with specialised funds of funds.

In the UK, in her new role as adviser to Man Group and the Newham Pension Fund, Judy Saunders, formerly pension chief at the $13.5 billion West Midlands Pension Fund, is still an advocate of funds of funds but contends that hedge fund investing is best used as "a process not an asset class".

It is true that some investors including Lancashire may have got burned in the past three years and are having a rethink of their goals. But in the end, liabilities do not go away and the best solution will be one that preserves capital as well as enhances it in some way.

Others, like Camden, are trying the single brand of self-invested hedge fund products of managers like BlueCrest and Brevan Howard, because at least at the moment their performance talks louder.

What all hedge fund athletes have to remember is that, like the Olympics that happens every four years, a lot can change in the investment review timeframe. Few Olym-pians repeatedly return more than two or three times; but there is always new, fresh energised blood to take their place.

The art of hedge fund investing is to realise that it is not a static game; and investment and allocation fitness is as important to buying hedge funds as stamina and endurance are in the Olympic sports.

New hedge funds start up every year and the elite FoHFs, like trained coaches, are great at spotting and nurturing talent. For example, Permal, like Tom Daley, continues to dive into the opportunities pool.

In this issue, our five-year review of the global FoHF industry proves that this trend is true of the allocators, too: of the 147 firms that were in the rankings in June 2007, only 78 are still there. It is not the same club, but with 103 members it is clear that new fresh blood is coming in year after year, with InvestHedge Award contenders The Bornhoft Group, Persistent Asset Management and Thalia being perfect examples of this.

The majority of those that are still in the ranking for five or more years – like Michael Phelps, the most decorated Olympian of all time with 22 medals to his name – have won many performance gongs.

I wonder if de Coubertin would mind too much if the global FoHF industry adapted his famous quote: "Hedge fund investing is not a system but a state of mind."

ISSN: 2151-1845 / CDC10004H