So long, hedge funds
The departure of the wealthy spells the end of a long-running party
The cocktail party chatter could usually be relied on to come round, sooner or later, to discussions of vintage. The seriously wealthy were not comparing notes on champagnes, or debating whether 1982 really was the best year for Château Petrus. They were talking about hedge funds.
It was one thing to have been able to invest with a well-regarded manager whose fund was normally closed; among those who were in, what mattered was when they got in. Whoever turned out to have invested earliest gained the most respect from their cocktail circuit peers.
Not any more. Hedge funds have become a dirty word among high net worth investors, who are pulling out as fast as they can. This is almost regardless of the cost in some cases: Hedgebay, a market for trading investors’ stakes in hedge funds, said investors are selling their holdings in some funds for a discount of 15%.
Tiger 21, a networking group for high and ultra-high net worth US investors, said its members have cut their portfolio weightings to hedge funds from 11% to 3% in less than a year.
Tiger 21’s founder Michael Sonnenfeldt said: “Our members feel they have been played for a fool by hedge fund managers.”
What mattered most to the wealthy was the protection of their capital. Hedge funds, it seemed to them, offered the promise of never losing money because they could take short positions. Shorts meant making money when prices fell. Investment gains would be there for the taking always, whether the market was rising or falling.
Last year proved hope was false. Hedge fund managers did not short anything like as much as they would have needed to if they were to make profits. Most long/short equity portfolios were net long. Those that did short often did so using exchange-traded funds, shorting an index rather than selecting individual stocks, and so missed out on the richest pickings.
Dedicated short-selling hedge funds, which had been losing money monotonously when the markets were going up, made money last year but only 20% or so, while markets fell 30% or more. High net worth investors were unimpressed with this performance. The comments that many managers made turned them off even more.
The typical manager, who had been happy to take credit for good performance when markets were rising, now blamed the markets for his losses. Where he had cursed volatility for being too low, he now said it was too high. Where he had insisted that investors talk about hedge funds as an absolute return strategy, dedicated to making money rather than to beating an index, he now brought investors’ attention to the fact that his fund had done better than the Dow – forgetting to mention that it had spent years underperforming it.
Pull the other one, said the high net worths, most of whom know what responsibility means, having made their fortunes the hard way, as entrepreneurs.
With the benefit of hindsight gifted by last year’s losses, they realised just how much managers’ fees had been eating into their gains when times were good.
When they thought managers were going to protect their capital come what may, they had been happy to pay two and 20, that is, annual management fees set at 2% of assets invested and performance fees set at 20% of any gains. Once that hoped-for protection failed to materialise, they felt taken for a ride, and they have turned away. They will not be back.
• Roll up, roll up
Hedge fund managers may be losing their longest-standing investors, but other sources of capital show signs of opening up.
UK local authorities – didn’t some of them deposit cash with Icelandic banks the week before those accounts were frozen? – said this month they wanted to be given greater freedom to invest in alternative asset classes such as hedge funds.
More than 60% of investment consultants polled by US asset management advisory firm Casey Quirk said they expected to see moderate demand for searches for hedge funds, along with private equity and real estate.
Meanwhile, hedge fund managers including the UK’s Brevan Howard, which was one of the few to make money last year, have been busy developing funds to launch to retail investors.
The forays into this sector made by other managers, including JP Morgan-owned Highbridge, suggests retail investors may have an appetite for these products, although their enthusiasm has a nasty habit of waning as quickly as it waxed.
Let’s hope these investors end up feeling happier with their hedge fund investments than high net worth individuals did.
• Schroders turns the tide
Investment management firm Schroders last year took in more money from UK pension schemes than it lost – for the first time in 11 years.
It is a testament to the dedication of the company’s client service and institutional business teams, and the efforts it has made to improve investment performance, with 60% of its institutional funds outperforming their benchmarks.
It also reflects the sheer determination of Schroders’ staff. Employee turnover has not been high over the years, which means most of the people there have stuck with their employer through thick and thin.
They have kept plugging away. It’s good to see their efforts rewarded.
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