Sovereign insolvencies, hyper-inflation, renewed recessions, currency collapses, political crises, volatile commodity prices, excessive regulation and the long-term impact of the vast economic stimulus programmes being conducted by most major central banks were among the many concerns and fears on the radar screens of hedge fund industry leaders this year as they came together for the annual two-day EuroHedge Summit in Paris last month.
Held at its traditional setting of the Palais de la Bourse in the heart of an overcast, chilly and at times stormy French capital on April 24-26, the ninth EuroHedge Summit brought together more than 800 leading figures from the global hedge fund industry and the broader finance industry at a time of huge and wide-ranging changes, challenges, opportunities and risks across the financial, economic, political and investment spheres.
Under the title of 'Strategies for a Challenging World', the Summit presented a stark and sometimes sobering assessment of the pressures, worries and issues facing all those involved in the alternative investment world against a backdrop of high uncertainty, unpredictability and volatility at a macro, market and industry level.
And it left little doubt in the minds of all those present that the hedge fund industry is facing a major challenge in terms of delivering, after suffering two down years in the last four, the type of performance that investors want and need.
It came across loud and clear that the pressure is firmly on managers to perform this year, in what could be a make-or-break period for the industry as a whole, and to provide what the much-changed investor base in hedge funds these days is seeking.
Almost 90 leading investors, managers, advisors and intermediaries participated as speakers or panellists over the two-day Summit – with a wide range of investor communities including pension funds, funds of funds, private banks, seeders and family offices taking part in a number of investor-focused sessions.
A packed auditorium at the Bourse heard a diverse range of keynote speeches from BTG Pactual co-founder and former Brazilian central bank governor Persio Arida, from high-profile and highly rated US hedge fund manager Kyle Bass of Dallas-based Hayman Capital, and from ex-Gartmore European equity star manager Guillaume Rambourg – who had opened his new Verrazzano Capital firm in Paris just a few weeks before the event.
Arida, who had flown in specially from São Paulo to Paris to deliver his address on the very day that BTG Pactual was pricing its keenly watched and heavily oversubscribed global IPO, offered some fascinating insights into the challenges and opportunities in Brazil – one of the world's most dynamic, fast-growing and interesting economies at the moment.
He also provided some detail and colour on the culture, philosophy and strategy of the Brazil-based banking and asset management business that Andre Esteves and his partners have succeeded in building in just a few years into one of the world's most dynamic, fast-growing and interesting financial groups.
Bass – who, to many people, epitomises the type of straight-talking, straight-shooting hedge fund manager for which the US is renowned – travelled from Texas to deliver a riveting and somewhat alarming pre-cocktail presentation, zeroing in on a few key investment ideas.
His 'big short' theme was what he saw as the inevitable and increasingly imminent collapse of Japan as a result of its mountainous and still-climbing sovereign debt burden – with a resulting and devastating period of hyper-inflation and wealth-destruction ahead – while, on the upside, he outlined compelling opportunities in the US housing-related MBS markets.
By contrast, Rambourg – although an avid marathon runner himself – had journeyed by far the shortest distance of the three keynote speakers this year, with the trip from his new firm's base across the city in Avenue George V to the Summit taking just a few minutes.
One of the true veterans in the European long/short space, having run hedge fund money with his partner Roger Guy at Gartmore for over 12 years, Rambourg gave a frank and fluent address focusing on the prospects in European long/short equity investing at a time of acute and ever-mounting concerns and pressures in the eurozone – and on the strategy and rationale of his new Verrazzano firm, which he had chosen to headquarter in Paris.
In addition to the three keynotes, numerous other top-tier names from the manager and investor sides of the industry took part in the wide range of lively and probing panel discussions that were held over the two days.
Among the many high-calibre representatives from the manager community were Sir Paul Ruddock of Lansdowne, Manny Roman of Man GLG, Jonathan Lourie of Cheyne, Gavyn Davies of Fulcrum, Jens Nystedt of Moore Capital, Sushil Wadhwani of Caxton affiliate Wadhwani Asset Management, Darcy Bradbury of DE Shaw, Malcolm Butler of COMAC, Pat Trew of CQS, Paul Sansome of Ferox and Lee Robinson of Altana.
Newer firms were also well represented – with participants from a number of promising-looking and more recently launched operations including Ali Nejjar of Solaise Capital, Rob Kirkwood of Carrhae Capital, Emmanuel Weyd of Paris-based Eiffel Investment Group, former Rubicon co-founder Jeffrey Brummette of Onewall Advisors, Sven Bakker of Saemor Capital in the Netherlands and Anuraag Shah of US-based Tusker Capital.
Key figures from the investor and investment advisory world included Larry Powell of Utah, Niels Oostenbrug of Mn Services, Sanjay Tikku of KAUST, Mark Geene of PGGM, François Marbeck of La Banque Postale, Hilmi Unver of Notz Stucki, Jim Vos of Aksia, Christopher Fawcett of Fauchier Partners, Stephen Oxley of PAAMCO, Claire Smith of Albourne, Matthew Roberts of Towers Watson and Nicola Meaden Grenham of AlphaStrategic.
This year's Summit – the ninth to be held in the French capital – was the first to take place in the middle of a French presidential election, being held in the week following Nicolas Sarkozy's initial loss in the first round and 10 days ahead of his eventual defeat by new president François Hollande.
Along with the gloomy and changeable weather, the changing political background in France helped to provide an appropriately unsettled backdrop for the event at a time when markets look likely to remain in thrall to political events and macro developments – with many significant elections and leadership transitions coming up, not least in the US and China.
And the general sense of uncertainty and unpredictability was heightened by the fact that hedge fund performance had taken a turn for the worse in the run-up to the Summit after a generally strong start to the year.
After a good first quarter, helped by an upsurge in sentiment on the back of QE-style liquidity injections by the ECB, the Fed, the Bank of England and other central banks, performance has begun to stutter again on the back of a resurgence of worries about the eurozone debt crisis and the apparently faltering economic recovery in the US.
As a result, earlier hopes that 2012 was shaping up for a repeat of 2009 – when hedge funds roared back from the problems of 2008 with a year of very strong performance – were fast being replaced by fears that this year was more likely to see a reprise of 2011 all over again.
The overall purpose of the Summit comprised three principal objectives. The first was to assess the big-picture opportunities, risks and challenges facing the hedge fund industry as a whole – from the perspective of managers, investors and their counterparties – in the context of the major changes and upheavals taking place in the wider financial world and in the global macro-economic and political scene.
The second was to analyse the prospects in a range of specific investment strategy areas – including global macro, commodities and energy, equities, emerging markets, credit, event-driven and distressed investing, managed futures and quant-based systematic trading.
This strategy-specific content also included a dedicated session looking at the increasingly popular and varied range of volatility and tail risk strategies available to offer investors ways to protect against – and profit from – the high levels of market and macro volatility, and the potential tail events that are of such acute concern at the moment.
And the third aim was to address the operational and business management issues and challenges facing the hedge fund community – again from the perspective of managers, investors and their various counterparties.
Topics included: capital-raising, seeding and start-ups; counterparty and business risk; the tsunami of regulatory changes aimed at hedge funds, the broader finance industry and the markets in which many managers operate; recent onshore and offshore fund developments and trends; changing investor requirements vis-à-vis transparency, due diligence and risk reporting; and the future for the alternative investment industry in France itself.
Despite the less than seasonal springtime weather in Paris, and despite the correspondingly dark and stormy clouds gathering on the macro and market horizon, the general mood at the Summit was upbeat, lively and sharp.
There was plenty of optimism in evidence – in terms of the perceived opportunity set across a wide range of strategy areas. And there was widespread consensus that a global financial market environment that is shrouded in uncertainty and volatility ought to provide ample potential for hedge funds in many different areas to generate strong risk-adjusted returns.
But there was no shortage of pessimism, too – not least concerning the continuing turmoil in the crisis-stricken eurozone, but also at political and economic threats and challenges in the US, in China, in emerging markets, in the Middle East and elsewhere.
And, above all, there was a widespread realisation that – after the disappointments of 2011 and despite a generally good first quarter for the industry in 2012 – hedge fund managers are to a very large extent 'on trial' in 2012 as far as many investors are concerned.
For many clients that have come into the industry only in recent years, their experiences have not lived up to expectations. And there is a clear feeling of disappointment in many quarters, and even dismay, at the perceived inability of hedge funds to deliver what many investors are looking for.
For the moment, most allocators appear to be sticking with their hedge fund commitments. There is little sign of large-scale investor withdrawals from the industry – and certainly no sign of the mass redemptions that were seen in the debacle of 2008.
On the contrary, most of the recent investor surveys show clearly that virtually all types of institutional, intermediary and individual investors are still planning to increase – rather than decrease – their allocations.
This reflects a widespread view and hope that, in a period full of volatility and fear, hedge fund investing should – in theory at least – offer substantially better prospects for risk-adjusted returns than pretty much any other type of investment or asset class.
But, for many investors – particularly newer ones to the industry, and especially for those whose more institutional objectives can sometimes be very different from those of the more traditional individual and intermediary-type investors in hedge funds – the reality of the last few years has been very different from the theory.
In many cases, hedge funds have failed to deliver the diversification, reduced volatility, downside protection or lack of correlation that institutional investors in particular have been seeking – albeit in very macro-obsessed and politics-driven markets where fundamentals have been overwhelmed by continually oscillating short-term sentiment.
There was a clear sense among delegates that another poor year in 2012 could well lead many investors to re-evaluate their strategies and attitudes towards hedge fund investing in general – almost irrespective of the performance of individual managers and funds.
So the overall tone of the discussions and debate over the two days in Paris left no doubt that the industry is reaching a potentially very significant turning point – and that much will depend on the performance over the next 12 months or so.
For all the potential investment opportunities that hedge funds might be able to exploit in this extraordinary period of challenge and crisis – and for all the business opportunities that are opening up to hedge funds in a radically changing financial and investment world – the industry's long-term future is perhaps more reliant now than ever on short-term results.
And the message coming out very clearly from Paris this year is that the industry is facing some major changes in terms of fees, incentivisation structures, consolidation, regulation, investor attitudes, its perception, its durability and, quite simply, its reputation.
As Sir Paul Ruddock, the co-founder of Lansdowne Partners, said – in a remark that got to the heart of what most of those present at this year's Summit were feeling: "We charge a premium price and that means you have to deliver a premium product