This week I spent 3 days in Paris, attending the Hedge Fund Intelligence Summit 2016! It's one of few European conferences I attend during the year – and I was looking forward to taking the temperature of the HF industry, after the poor start that equities and other traditional assets have had this year!
My first observation after arriving at the Place de la Bourse venue was the feeling of fewer people attending relative to last year. Of course, I could be wrong, but nevertheless, I had expected a more buzzing reception when I arrived…why?…because after 6 years of an equity Bull market, we finally saw signs of a market environment where Hedge Funds and CTAs can shine and show what low correlation or even negative correlation really looks like.
At 9:05 sharp on Day 1, I was sitting in the huge auditorium (which by the way is a great place to host the speakers events) ready to listen to famous managers and investors debate topical issues and challenges facing the HF industry combined with a few Key Note speakers throughout the day.
I'm not going to waste your time with a detailed review…but just to give you a few take-a-ways from my perspective.
There were 4 main themes that came up throughout the event:
- Investors were complaining about low and disappointing returns produced by Hedge Funds with too high correlation to equities
- Investors were complaining about the fees charged by Hedge Funds
- Managers were complaining about the Zero Interest Rate environment which they blamed for their low returns
- Investors & Managers were worried about the low liquidity in the markets they trade
…not a very optimistic message to the audience.
After a long day, I returned to my hotel, surprised about what I had heard during the day…but optimistic that Day 2 would surely bring better news.
For those of you who don't know the HFI Summit in Paris, they always organise a late night event at the famous Buddha Bar on Day 1…but since I don't find partying all night very appealing when you have spent good money to attend a conference, I was prepared for even fewer people turning up in the morning of Day 2…but I will say that the HFI moderators were fresh and ready to go, on time!
For me personally, I was most excited about the Fund of Funds session in the afternoon, with 4 large and well-known firms making up the panel. However the list of excuses from Day 1 continued throughout the session and so when the moderator opened up for Questions (and no one raised their hand)…I took the opportunity of asking a burning question I have had for years!
So if your [the funds of funds] main objective is to create robust portfolios with low correlation for your clients, why is it that you allocate the vast majority of your money to managers who invest in the same underlying assets that you are trying to diversify away from, instead of allocating to CTA's which is the least correlated strategy in the alternative space?
The room went quiet, some people turned their head as I asked the question…my pulse went up…had I asked an impolite question of this esteemed group of investors, investors I would like to have as clients one day?
One of the funds of funds panelists finally started to speak. His answer was “but we can't allocate all the money to CTAs”
I thought that was an odd answer, because none of the firms on the panel had very much, if any, exposure to CTAs!
Then another panelist jumped in…“I think the AuM of CTAs just hit a new High” …“Year” said one of the other speakers, as if this was proof that their firms were responsible for this growth!
And that was the answer I got to my question…
Frankly, I had hoped for a bit more of a response.
But the good news was, that many in the auditorium came up to me after the session and said “Best question of the day” – so at least it proved to me, that I wasn't the only one in the audience that wanted to find out why these BIG and PROFESSIONAL investors did not see the problem in creating un-correlated returns to their investors by investing in the same underlying assets as they (by their own words) are hired to diversify away from.
In addition, by having a meaningful allocation to CTA's, they would resolve the other complaint they had, namely the liquidity risk (i.e. lack of liquidity in the underlying investments of Hedge Fund portfolios), as CTAs predominantly trade in futures markets, with little or no counter party risk and they continue to be super liquid as demonstrated during the last financial crisis despite massive increase in volatility.
And of course, we can't forget the complaint about performance, which many of the Investors on display, did not find to be as good as they used to be. On that point, I find it hard to believe that Investors and Consultants who are responsible for creating some of today's Mega Managers with $10+bn under management, don't take any of the blame on their shoulders?
- Do they really believe that managers with this amount of assets can perform the same way as when they were a $1-3bn manager?
- Do they really believe that managers with this amount of assets have any commercial interest of targeting high returns if it means higher risk of losing the management fee income they can earn on $10bn+?
The encouraging answer to all of this is, that there are managers out there, who really can deliver high absolute returns, despite the Zero Interest Rate Environment, and who can do it in super liquid markets that can help Investors off-set the illiquidity in some Equity and Fixed Income markets.
When I look at the firm I work for, and how our annual average returns since 2013 have been in excess of 25% (Net of Fees) compared to our 15% (Net of Fees) annual average returns since 1984 – I can't understand why the panelists I watched at HFI this week spend so much time coming up with excuses, instead of providing solutions, i.e. identifying managers, that over 4 decades have proved to be able to continue to innovate and deliver attractive un-correlated absolute returns…oh and by the way, have done it without ever charging a Management Fee! (which takes care of the last complaint voiced by Investors in Paris).
I wish I had learned more about these solutions in Paris, but of course….there is always next year!