“Groupie days” over for funds of hedge funds
Written on March 18, 2009
Funds of hedge funds which have limited losses and can demonstrate robust manager selection and monitoring processes will survive the hedge fund wreckage, even though the industry has just seen its worst year on record.
Fund of funds that survive what is a critical period for the industry will no longer be “glamour toys,” as the hedge funds they invest in were once described, but companies whose professionalism is open to external scrutiny.
“Extreme due diligence will be the focus going forward. The hedge fund industry is rapidly waking up to the new reality,” Malcolm Paterson, partner at Zurich-based asset manager Signina Capital, told Reuters in an interview.
“In funds of funds, the days of hedge fund groupies picking managers off the cocktail party circuit are over,” said Paterson, whose company manages $500 million and develops bespoke client portfolios.
Kevin Gundle, partner at alternative investment advisor Aurum, which invests $1.2 billion in single hedge funds, said fund of funds managers who can prove sound risk management skills and an impeccable record for integrity are the most likely survivors.
“You want managers with the sensitivity and humility to approach money management with focus and discipline, and the understanding of what can go wrong,” Grundle told Reuters.
“Investing is not about the testosterone-fueled egos and bravado that we’ve seen permeate the hedge fund world over the last few years.”
HARD TIMES
Fund of hedge funds select and invest in single hedge funds to diversify risk free credit report and score. Those that want to survive will have to show they can both choose the best managers and monitor their risk.
Yet just a year earlier things were much easier for fund of funds, once the first port of call for investors wanting diversified access to single funds but without the resources to conduct the research into a growing universe of funds.
Then in 2008 and early 2009, market turmoil, a commodities boom and bust, volatile currencies and other issues culminating in the Bernard Madoff scandal combined to batter the image, performance and asset base of most single funds.
In spite of their supposed diversification, fund of funds have fared little better. With many nursing losses of 20 percent and more in 2008, investors have fled en masse.
These vehicles have been berated for failing to protect investors, taking excessive fees on top of high underlying fund fees and overstating their ability to identify the best funds.
Paterson said poor performance was the biggest stumbling block for funds of funds last year until September 2008. Then the Lehman collapse raised the specter of counterparty risk and investors sold up as they scrambled for liquidity.
Some funds of funds changed redemption rules to prevent a redemption-liquidation spiral forcing them to sell into illiquid markets. In return, investors wanted lower fees.
Filed in: management.