By Sam Jones, Hedge Fund Correspondent
Published: September 17 2009 00:08
In September 2008 wealthy customers at a UK private bank were offered the alternative investment opportunity of the year: a chance to put money into a portfolio of five of Europe’s most-prominent activist hedge funds, including The Children’s Investment Fund, Atticus, Toscafund, Hermitage and Centaurus.
The bank reasoned that activist strategies, which typically involve taking stakes in companies and lobbying their boards for change, were set to outperform. So much so that it offered its customers a significant margin: for every pound they invested, the bank would lend them another four.
One year on and Atticus and Centaurus have announced the liquidation of their flagship funds. Toscafund, run by former Credit Lyonnaise banking analyst Martin Hughes, saw its leveraged investments in financials cause a staggering 67 per cent fall in its portfolio.
Hermitage Capital, meanwhile, was the single largest investor in the Russian stock market, which in the fourth quarter of 2008 fell 45 per cent. Even TCI, the largest and best-known of the funds in the basket ended 2008 down 43 per cent.
Those clients that took up the banks’ attractive offer, with leverage, now owe it more money than they invested.
It is on the back of such experiences that high net worth individuals, via private banks and funds of funds, have been the single largest investor group to exit the hedge fund sector over the past 12 months.
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Bank of New York Mellon and the US consultancy Casey Quirk concluded in research this year that wealthy individuals had pulled $500bn from hedge funds since the collapse of Lehman Brothers, accounting for the bulk of the industry’s huge outflows.
While many hedge funds say high net worth investors will also be the quickest to return to the industry, they are also planning for a longer-term shift.
An increasing number of fund managers are focusing on how they can attract and keep investment from institutional investors, such as pension funds and insurance companies, which manage huge pools of capital and are under increasing pressure to deliver higher returns.
Institutions account for about 43 per cent of the money invested in hedge funds. But according to the research by BoNYM and Casey Quirk, this will rise to about two thirds by 2013, with pension funds alone set to allocate $252bn. Talk of “institutionalisation” is now commonplace. But the change is not necessarily being looked forward to.
The industry is growing up and getting more “boring” according to one London manager: “Private banks and high net worth didn’t ask so many questions and didn’t tie up so much time with paperwork.”
“More paperwork” is the starting point for a more dynamic, demanding and exacting relationship with clients that leaner, performance-driven hedge fund outfits are finding hard to embrace.
Funds are facing longer periods of due diligence, greater demands on transparency and in some cases, even reviews of their underlying terms and fund structures. “The ‘I am a genius, give me your money and get lost’ days are over,” said one London hedge fund partner, from a firm that has courted institutional clients for the past few years. “You can’t just hire some asset manager from xyz investment bank and then expect money to come in.”
The stiffest competition among funds for staff is nevertheless no longer simply for trading talent, but for relationship managers and salespeople.
Several UK funds have specifically hired salespeople in New York, while US-funds that previously had little footprint in the UK and Europe, have begun to make inroads.
One significant uncertainty for both is what the European market will look like in a few years time.
The European Commission’s draft directive could cut off European institutions from alternative asset managers and withdraw a significant investor base from the global market, say its opponents.
Copyright The Financial Times Limited 2009
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