The world of the hedge fund manager has never been a dull or staid one. But the seismic changes now taking place, to both long-short and traditional managers keen to populate the alternatives space, may prove the most significant in the short history of this often controversial asset class, now worth a record $2,000bn (€1,400bn), according to Hedge Fund Research.
Prompted by regulation, a broad dissatisfaction with fee and performance levels amidst the still smouldering embers of the financial crisis and the widespread need for more innovative products, the latest chapter of the hedge fund saga promises to leave no corner of the colourful industry unturned.
James Bevan, who has invested in a variety of hedge funds, in both his current role as head of investments at charity fund managers CCLA and previous job as CIO at Spanish bank Santander in the UK, proclaims a profound disillusionment with large swathes of the industry, particularly some high profile quantitative players.
According to research consultancy Create, only 12 per cent of hedge funds typically make positive returns gross of fees and this number shrinks to 9 per cent for net returns, with assets increasingly concentrated in the hands of a small coterie of larger managers.
“Some of those hedgies whom I respect, and who I thought I understood their processes, did not do well in the crisis,” recalls Mr Bevan, picking out the quant funds within the alternatives arm of Goldman Sachs, for particular criticism.
“Commitment, a clear well-understood risk adjusted process, high calibre individuals and constant attention to detail: I thought Goldman had all of those. But subsequent returns from their alternatives business suggest their models were deeply flawed. It is not credible to suggest we are living through an exceptional period and much more appropriate to say ‘we simply got it wrong’.”
He talks also about the unexpected problems encountered at Axa Rosenberg, where legendary Californian finance professor Barr Rosenberg was an undisputed quant guru for several decades.
“Barr Rosenberg, I thought, was one of the most talented equity analysts of his generation and I would never have predicted the demise of the Axa Rosenberg model,” comments Mr Bevan, who outsourced significant assets to both Goldman Sachs Asset Management (GSAM) and Axa during his time at Abbey and later under Spanish parent Santander. GSAM has more than $150bn in alternative assets and sources say it would be wrong to apply any misgivings about quant funds to the rest of its hedge fund and alternatives business.
“Somebody recently told me: ‘I used to be funny, now nobody laughs at my jokes any more.’ There is an element of that in some of these asset management and finance models,” adds Mr Bevan. “My concern is that it is difficult to determine what is genuine skill and what is purely good fortune.”
If funds such as those in Goldman’s quant stable – which gave investors regular access to one-time quant king of New York Bob Litterman – are not infallible, what hope is there for the rest of the universe?
“There are still a lot of hedge fund managers who present on the basis of a track record,” says Mr Bevan, citing the Madoff funds as a particular example which astute investors could have avoided. “They are not prepared to open the lid on their process. We send them away, but a lot of people are prepared to give them money on that basis.”
There are voices in the industry, however, including previously vociferous critics, who believe the situation is changing, and increasingly swinging to investors’ favour.
“Opacity – in both business operations and investment strategies – has always been the hallmark of hedge funds, but that is now going,” says Amin Rajan, founder and chief executive of the Create research consultancy, which regularly surveys institutional investors about their attitudes to investment strategies and asset allocation.
“There won’t be transparency around daily positions and transactions, as that would be giving away the game,” but clients, post Madoff and Lehman, are demanding a much more detailed picture of daily business operations if they are to keep their money with some of the more secretive groups. “Investors are simply saying: ‘I want to give my money to somebody who runs this as a normal business.’”
The most striking change is an overhaul of the hedge fund industry’s long ingrained charging system, the so-called “2 & 20” model, which levies investors 2 per cent of invested assets plus 20 per cent of any profits made on an annual basis.
The “2 & 20” will now remain purely the preserve of the tiny minority of groups delivering stellar returns – the likes of Brevan Howard, Thames River, Halcyon, Sloane Robinson and the Man Group/GLG – rather than an accepted industry norm for those providing leveraged beta, believes Mr Rajan.
