Risk, returns and regulation were the three over-riding themes dominating the debate among hedge fund industry leaders this year as they came together for the annual two-day EuroHedge Summit in Paris last week.
Held at its traditional setting of Palais de la Bourse in the heart of a wintry and unsettled French capital on May 21-23, the 10th EuroHedge Summit brought together 750 leading figures from the global hedge fund community and the broader finance industry at a time of major changes and challenges across the financial, economic, political and social spheres.
Under the title of 'Strategies for a Complex World', a high-level audience heard keynote speeches from The Children's Investment Fund founder Chris Hohn, Toscafund chief Martin Hughes and Balysany Asset Management founding partner Taylor O'Malley – as well as a series of panel discussions covering a wide range of strategy, industry and business issues.
The mood of the event was upbeat and a good deal more confident than in the past two or three years – reflecting the generally strong performance of most hedge funds in the buoyant and more settled market conditions of the last several months.
And that positive tone continued into the second day, despite an overnight fall of more than 7% in Japan's previously surging stockmarkets – which caused other global equity indices to fall back as well amid growing concerns that the powerful equity bull market sentiment of recent months might be running out of steam.
Quantitative easing – and the likely timing and effect of its slackening and eventual withdrawal, particularly in the US – was a prevailing and persistent topic of concern to managers and investors over the two-day event.
At a macro level there were many other big and pressing issues on the minds of speakers, panellists and delegates alike: on interest rates and the increasingly hazardous search for yield by investors at a time of record-low returns in government bonds; on currency wars; on sovereign and financial sector indebtedness; on the continued problems in the Eurozone; on inflation and deflation risks; on the likely success or otherwise of Japan's reflation revolution; on possible bubbles in China, in credit markets and in other risky assets; on the likelihood or not of a 'great rotation' into equities; on commodity and energy prices; on the social impact of austerity measures in the EU and elsewhere; and on much more besides.
But underlying much of the debate was the central dichotomy of how to reconcile the increasingly risk-averse nature of the institutional investor base that is starting to dominate the hedge fund landscape with the need – and desire – of managers to take increased risk at a time of rich opportunities across most asset classes and hedge fund strategy areas.
"The hedge fund industry is doing a disservice to itself by putting risk before return," said Hohn – one of the legendary figures in the European hedge fund world over the past decade – in the course of a compelling, personal and very candid keynote address that captured the dilemma facing many managers and investors.
Hohn – whose $5 billion flagship TCI fund is up by some 20% this year and by almost 30% over the past six months – added: "The industry must be prepared to take more risk in the sense of embracing price volatility – but not in the sense of what risk really is, which is permanent loss of capital."
Underlying Hohn's address was the sense that successful hedge fund managers over the long term need to be true to themselves as investors and managers of their own money – and should not try to be what they think investors want them to be.
With around $1 billion of his own money in the fund and a long-term annualised return of around 18%, Hohn's central point that investors in hedge funds are more aligned with the custodians of their capital than in any other area of asset management had a particular resonance.
"Our strategy works – that's all that I can say," he said. "People say to me 'you're too controversial, you're too directional, you're too concentrated, you take too much risk'. I say to them 'that's all true; but I make money'."
Toscafund's Hughes – whose firm has also been generating punchy performance over the past year or so – was in equally frank and forthright form, focusing on the exceptional opportunities for high returns in UK equities that investors should be able to achieve.
Having weathered, like Hohn and TCI, a difficult time in 2008, Hughes and his team have bounced back impressively – through a similar style of concentrated and fairly activist equity investing that has served their investors very well at a time when hedge funds in general has attracted some criticism in the outside media for their low returns relative to equities.
Together, Hohn and Hughes presented compelling evidence of the continued ability of hedge fund managers to maximise returns for investors by taking well-judged risks and embracing opportunity – at a time when many of the pension fund and institutional-type investors that are pouring money into hedge funds are obsessed with minimising risk, minimising volatility, minimising correlation and minimising fees.
And concern over the pressure on returns was exacerbated by the widespread sense of frustration and dismay at the extent of all the new regulations that are being aimed at the alternative asset management industry, both in the EU and beyond.
Speaking on the hedge fund CEOs panel in which he has participated for several years, Sir Paul Ruddock – the soon-to-retire co-founder of $12 billion London-based Lansdowne Partners – said the influx of regulation was the greatest threat facing the industry.
Ruddock agreed that the past 12 months have generally seen improved hedge fund performance compared with the previous few years. But he observed that there are challenges on the horizon – notably the Alternative Investment Fund Managers Directive, which comes into force in July.
He described the AIFMD as "creating a far more constrained environment, and creating a lot of uncertainty. As an equity house, I think there's still a lot of good value to be found in equities – but the major risk to the industry is regulation."
In all some 85 leading hedge fund managers, investors and counterparties participated in the EuroHedge Summit – on a series of sessions covering specific strategy areas (including macro, equities, emerging markets, CTAs and systematic investing, fixed-income, credit and structured credit) as well as broader industry and business management issues (ranging from operations and OTC clearing to regulation and the hedge fund business models of the future).
Moreover the perspectives and views of leading investors in hedge funds were fully aired throughout the two days – with numerous top-tier investors and advisers participating in the Summit from across the full spectrum of the pension fund, family office, institutional, private bank, endowment, fund of fund, intermediary, consulting and seeding communities.
A full report on the 2013 EuroHedge Summit will be published in the June edition of EuroHedge. In a new addition this year, online televised interviews with some of the leading participants at the Summit can be seen on the Euromoney Online Channels website here.