Rich investors shun hedge funds
Source: Agencies |
October 23, 2012, Tuesday
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Print Edition
Print Edition
RICH private investors are turning their backs on hedge funds because moves to attract more conservative pension fund clients mean managers no longer deliver the big returns they crave.
The fastest growing source of new money for hedge funds is now pension funds and insurance companies who want managers to go easy on risky trades.
Funds are finding it hard to say no to the big money these investors offer so rich clients are feeling neglected.
The hedge fund industry's changing investor base has also corresponded with explosive growth in size, leaving rich clients questioning how easy it will be for managers to make money in future. Global assets in hedge funds now top US$2 trillion, far more than the US$200 billion or so run in the mid-1990s.
"That's a huge deal," said John Elmes, head of investments at GenSpring Family Offices, which runs money for some of America's most prominent families and has invested in hedge funds since the late 80s. "It makes it very hard for these managers to continue to outperform."
Hedge funds seek to exploit and profit from inefficiencies in markets, and unlike traditional investment funds which only bet on prices rising, they have the mandate to wager on prices falling and can borrow money to amplify the size of their bets.
But with much more capital chasing the same opportunities those inefficiencies are quickly ironed out, making it harder for managers to earn returns above the market.
So instead of hedge funds, many of the private investors are putting their millions into private equity, old-fashioned long-only stock pickers or even property or fine wine, which have often outperformed hedge funds since the 2008 financial crisis.
The new breed of investor - such as the Church of England and the UK's Universities Superannuation Scheme - choose hedge funds for very different reasons than did the friends, family and few favoured high-rollers who originally backed managers.
While many want funds to mitigate against falls in their other investments - one of the original purposes of hedge funds - they do not want them to do this by simultaneously taking on big risks looking for huge potential profits.
This means funds have to curb some of their more aggressive tactics, such as using lots of borrowed money to amplify the scale of trades - a far cry from the golden age of hedge fund returns before the crisis.
The fastest growing source of new money for hedge funds is now pension funds and insurance companies who want managers to go easy on risky trades.
Funds are finding it hard to say no to the big money these investors offer so rich clients are feeling neglected.
The hedge fund industry's changing investor base has also corresponded with explosive growth in size, leaving rich clients questioning how easy it will be for managers to make money in future. Global assets in hedge funds now top US$2 trillion, far more than the US$200 billion or so run in the mid-1990s.
"That's a huge deal," said John Elmes, head of investments at GenSpring Family Offices, which runs money for some of America's most prominent families and has invested in hedge funds since the late 80s. "It makes it very hard for these managers to continue to outperform."
Hedge funds seek to exploit and profit from inefficiencies in markets, and unlike traditional investment funds which only bet on prices rising, they have the mandate to wager on prices falling and can borrow money to amplify the size of their bets.
But with much more capital chasing the same opportunities those inefficiencies are quickly ironed out, making it harder for managers to earn returns above the market.
So instead of hedge funds, many of the private investors are putting their millions into private equity, old-fashioned long-only stock pickers or even property or fine wine, which have often outperformed hedge funds since the 2008 financial crisis.
The new breed of investor - such as the Church of England and the UK's Universities Superannuation Scheme - choose hedge funds for very different reasons than did the friends, family and few favoured high-rollers who originally backed managers.
While many want funds to mitigate against falls in their other investments - one of the original purposes of hedge funds - they do not want them to do this by simultaneously taking on big risks looking for huge potential profits.
This means funds have to curb some of their more aggressive tactics, such as using lots of borrowed money to amplify the scale of trades - a far cry from the golden age of hedge fund returns before the crisis.
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