Charles Baillie, global head of alternative investments valued at $90bn (€60bn) within Goldman Sachs Asset Management (GSAM), can see a light at the end of the tunnel. After a mass rush to liquidity during 2008 and the early part of 2009, he is witnessing some improvement of sentiment and private client money returning to hedge funds.
His dedicated unit constructing customised portfolios for high net worth individuals investing more than $15m – whose specialists were twiddling their thumbs in something approaching a ghost office earlier this year – are now working closer to capacity. Flows from Europe and the Middle East, admittedly generated by a small number of high net worth clients, are at last back to $100m per month, compared to zero at the start of 2009.
While there is now a natural reluctance among liquidity-conscious customers to put money behind lock-up strategies like credit and distressed debt, commodity-led traders remain popular, as are directional equity long-short and global macro funds.
Mr Baillie is even surprised by how quickly some groups of investors have returned to the hedge funds market, despite having lost money in 2008. While very few clients are allocated at the 20 per cent level, recommended by many private banks still clinging to an outdated notion of efficient portfolio theory, there has definitely been a change towards a more positive mindset in alternatives, he believes.
In January and February of 2009, there was still a huge disappointment with hedge funds prevailing among investors, because they had lost so much money in a mistaken bet on absolute returns, and were unable to withdraw what was left over. “The promises which made hedge funds better than public markets were clearly not true,” laments Mr Baillie.
But by the middle of the year, they saw hedge funds had lost only 20 per cent, while the broader market had fallen 40 per cent, and started to re-examine the asset class in a new light. “Over any extended period of time, people have realised that hedge funds have grown twice the market, with half the volatility,” he adds.
The trend he is seeing among private clients, the segment which has been responsible for a much greater rate of redemption across the industry than institutions, is that investors do not want to go back to the kind of vehicles they saw two years ago. “Instead, they are going back where they can see more transparency, liquidity and control. We aim to get better deals for them with managers.”
This concern about transparency means investors are actually concerned about prospects for and holdings of individual stocks within hedge funds, rather than just leaving everything to the fund’s manager.
A clear picture
“People increasingly want to drill down within the portfolio,” reveals Mr Baillie. “They want to better understand the process flow of what is happening to their dollar when they give it to Goldman – what stock or hedge fund is it going into? They want to know where overnight money is going to, when securities are leant and to which counterparty. People are a lot more interested in operational risk than they were before. Previously, it was just market risk.”
There is also an all-pervading theme of keeping things simple. “So many clients say to us: ‘I don’t want to invest in anything unless I can clearly understand what it is doing.’ This is a natural reaction to coming out of a period like 2008.”
GSAM is currently busy upgrading its HFS separate account platform for investors in hedge funds, in parallel with a new risk management system, which allows every underlying position within a multi-vehicle fund to be broken down and analysed for its risk characteristics.
Although Goldman has been notoriously sensitive in the past about discussing any of its proprietary hedge funds, this policy is changing, now that investors’ money is no longer so easy to come by and because clients are demanding more information. Flagship funds which are part of the GSAM offering include the credit focused Liberty Harbor, featuring a team recruited from Amaranth, after the US fund collapsed, the equity long-short GSIP and the quantitative macro oriented Global Alpha fund.
One of the questions currently occupying the minds of larger private clients is how to deal with inflation. Half of the client base is currently pre-occupied with the prospect of 1970s style inflation rearing its head within three years, while the other half is more worried about massive deflation, along the lines of a Japanese scenario. In order to cope with the inflationary spectre, protect against a falling US dollar and take advantage of potential growth in emerging markets, Mr Baillie sees benefit in investing in real assset, predominately commodities related, strategies. Many clients are also more comfortable with strategies that can be packaged into a Ucits III mutual fund format, whereas historically clients could only access private vehicles, with limited liquidity.
