The market for new hedge funds is burgeoning. Numbers are back to 7,000 – short of the 7,600 high in 2008, but a recovery from the 6,800 recorded last year, according to figures from research consultancy Investment Quotient.
Many new launches have been driven by the closure of investment banks proprietary desks under the “Volcker rule”, named after the former chairman of the Federal Reserve who instigated the regulation clamping down on the extent to which banks can bet with their own capital.
Big names can still raise substantial amounts of money. Goldman Sachs star trader Morgan Sze’s is raising over $1bn (E750m) for an Asia venture, Azentus Capital, which will have a team of 30, one of the largest hedge fund launches since the credit crisis. Nine members of Goldman’s proprietary trading team have already joined KKR, while a former Credit Suisse commodity trader has poached colleagues to set up a hedge fund. A proprietary trading desk at an investment bank can effectively be a fully-functioning hedge fund business from day one and several banks such as Morgan Stanley are also spinning out their prop teams.
The consolidation of the market into fewer hands is continuing, with around 80 per cent of hedge fund assets held by the top 50 managers, according to Charles Krusen, chief executive officer of Krusen Capital Management in New York. The largest hedge funds are monitored by consultants, which gives investors comfort and helps attract new money.
Investors also expect more. “An existing big name is more likely to open a new strategy than a completely unknown manager because of the requirement for the manager to have institutional quality infrastructure, albeit without institutional bureaucracy,” says Mr Krusen.
This flight to quality may soon be played out, however. “Over the next year or so the trend to large players may come to an end,” says Chris Wyllie, a partner at Iveagh Private Investment House. “We’ve seen an institutionalisation of the hedge fund space with the big boys getting bigger, and making acquisitions, and starting to morph back into broadly-based asset managers, the very style they moved away from 10 years ago. Leading names in the hedge fund space are starting to look and feel more institutional in their approach, albeit with good returns.”
Mr Wyllie anticipates a split in the hedge fund universe. “Investors can choose the largest managers’ Ucits and their steady Eddie approach, or can go for more esoteric strategies of smaller boutiques with more targeted risk.”
Private bank investors certainly continue to be heavy supporters of hedge funds; they like the notion of talented traders and uncorrelated investments. “The DNA of private bank and other high net worth investors has not changed,” says Pascal Botteron, Deutsche Bank PWM’s global head of hedge and mutual fund investments. “They are ready to go back to absolute return but are demanding greater due diligence and better liquidity.”
For some private bank clients, Ucits III funds have great appeal, offering the stamp of regulation, better liquidity and an advantageous tax treatment in the UK. Minimum investments are as little as $10,000 rather than the more typical hedge fund’s $1m. Several groups are growing their presence in the Ucits III market, taking advantage of Ucits passporting for distribution across Europe. Deutsche, for example, now has 22 Ucits III absolute return managers on its approved list. Its fund of Ucits III has taken $100m since its launch in July and a fund of managed accounts was launched in January.
However, the additional layer of Ucits fees is seen as a drawback. “While the retail investor may be wooed by the liquidity of the funds, we are of the belief that the cost of liquidity has never been higher,” says Rhian Horgan, international head of alternatives at JP Morgan Private Bank.
“The high yield market may be trading at spreads of 600 but private credit markets, particularly in the small/mid cap space are pricing in the mid teens. Within the context of clients’ asset allocations, they need to think about their liquidity budget and we can then allocate to managers who have shown a proven track record of extracting returns in less liquid markets.”
Andrew Popper, chief investment officer at Société Générale Private Banking Hambros, also sees “little interest in Ucits III from us as a private bank.” The real choice, he says, is offshore hedge funds registered in places like the Caymans, and managed accounts, which are becoming more predominant and are by far the main area of growth.
“Managed accounts offer liquidity, transparency, and safety. We are using them in a number of ways – in order to create funds which we can then unitise, to create the underlying for structured products, and, for large clients, to create bespoke portfolios.”
