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Institutional investors warned on pigeon-holing their managers
Nov 24, 2011 by Charles Gubert
The growing “tick-box” mentality of some institutional investors is damaging creativity in the hedge fund space and could lead to potential “star” managers shunning the industry altogether, it has been warned.
While improvements in hedge funds’ risk management should be welcomed, there is a danger that some institutional investors are becoming excessively conservative, which is stifling innovation among managers.
“The hedge fund industry has become institutionalised and a lot of investors are putting performance and returns behind risk. It is forcing hedge funds to make radical changes to how they operate and I sincerely hope that hedge funds do not sell their souls completely,” said Pedro de Noronha, managing partner at Noster Capital, a London-based global macro hedge fund, at the K&L; Gates/Advent Software Hedge Fund Summit in London.
Pension funds – who are no strangers to caution - are increasingly investing in alternatives. The California Public Employees’ Retirement System (CalPERS) provided $100 million in seed capital to a global macro hedge fund in Toronto in September 2011, for example. Nevertheless, some commentators are concerned that hedge funds are becoming too conservative for their own good. Furthermore, global regulation is inhibiting the emergence of new talent.
“The regulatory landscape is so complicated and constantly shifting that managing this is a barrier to entry for many new funds, which could discourage new investment talent from joining the industry,” said Mark Standish, chief operating officer at Egerton Capital.
Risk aversion among investors could lead to future superstar or even unconventional managers starting their careers with fewer assets or even being deprived of the opportunity to raise assets altogether. “The likelihood of an ‘out of the box’ superstar manager launching with $4 billion is fast receding. I suspect these managers will now be far more nimble, especially if they don’t want to sell out to big money,” said de Noronha. Such a scenario would certainly be a disadvantage for return-hungry investors.
Hedge fund titans such as George Soros and Julian Robertson were frequently given broad mandates to manage money by their clients. However, with the spectacular blow-ups in 2008 and subsequent Bernard Madoff scandal, investors are predictably demanding more oversight and greater transparency from their managers. Frequently, managers are severely restricted from trading certain products in their portfolios – which can diminish performance returns. “Investors should not pigeon-hole their managers too much,” added Noronha.
