Welcome to CanadianHedgeWatch.com
Saturday, March 28, 2020

Hedge Funds Uncovered for Institutional Investors

Date: Thursday, November 22, 2012
Author: Parin Shah, ProHedge.co.uk

In a world of volatile financial markets, the value proposition that hedge funds offer through “active risk management” and capital protection make them an even more compelling investment prospect for institutional investors; such is the conclusion of the Alternative Investment Management Association’s (AIMA) updated “Roadmap to Hedge Funds”, originally published in 2008, which aims to de-mystify the hedge fund industry for investors.

At Tuesday’s launch event, report author Alexander Ineichen of Ineichen Research and Management, stated that hedge funds’ ability to perform in the long term and recover sustained losses are important features driving institutional investor allocations. AIMA’s report arrives at a time when hedge fund assets under management (AuM) are at an all-time high of $2.2tn a figure largely due to institutional inflows. Ineichen points to greater concentration in the hedge fund industry towards larger funds with “institutionalisation” and regulation resulting in a preference for so-called “brand names”. “The private investor has left the building to some extent,” remarked Ineichen.

Ineichen commented that hedge funds can have a beneficial role in reducing systemic risk in financial markets by increasing heterogeneity. “As long as they do something different, it’s beneficial for the financial industry. But if you increase regulation you are among other things making markets more homogeneous”. This remains a tentative balance and one that regulators should certainly be wary of as the industry continues to mature. What about the age-old adage that hedge funds can offer equity-like returns with bond-like volatility? Ineichen agrees that this concept simply does not hold anymore.

Despite a recent spate of high-profile closures, new launches are still being seen and Ineichen points to a natural flow of talent moving to the hedge fund space. While the number of launches has decreased, size of new funds has increased considerably. The average fund starting up in 2009 had AuM of $60m compared with $160m today. Where are these new funds coming from? Anita Nemes, Global Head of Capital Introduction at Deutsche Bank identifies more and more 2nd generation fund managers, with fund-of-funds taking a greater role in seeding capital in an effort to diversify their value proposition. For the individuals looking to start-up, Nemes eloquently pointed out it remains a question of “Do you want to run money or do you want to run a business?” This is a question that 2nd generation manager and prop desk spinouts will have to ask themselves next year. There is an appeal to remain in, or join a large established fund manager, to share business infrastructure and operating costs.

A fundamental problem for investors at the moment lies in the changing norms within the market place. Traditionally, bonds were seen as a stable investment, however as soon as yield curves start creeping upwards, there will be a problem. Insightful as ever, Ineichen comments: “more and more, institutions are realising that doing nothing is a very active call, and not the best one”. It comes back to the “active risk management” ability of hedge funds which despite the recent industry challenges, still seems to attract investors.