Firms at the crossroads: Offer alpha or disappear
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • BentallGreenOak agrees to acquire Metropolitan Real Estate Equity
      watch video
      0:45
      Private funds weathered 2020 turmoil
      Daniel McHugh
      Aviva Investors promotes from within for real assets CIO
      Marc Rowan
      More alts managers seek expansion to retail market
    • Kieran Mistry
      Hymans Robertson picks head for new non-traditional risk transfer unit
      Troy Saharic
      NEPC brings on director of new business development
      Bill Foley
      Foley-backed SPAC agrees to $7.3 billion deal with Alight
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
    • A pharmacist administers a dose of the COVID-19 vaccine in Mountain Brook, Ala., on Feb. 21, 2021
      Business optimism grows as vaccinations spread – Fed
      watch video
      0:59
      Coronavirus and the S&P 500: February 2021
      Multiemployer pension measures cleared for relief bill vote
      The Charging Bull statue is covered in snow near the New York Stock Exchange on Feb. 11, 2021
      Bain: Private equity managers finish 2020 strong
    • DCALTA releases daily valuation tool for alts in DC plans
      PSCA: Employee participation in non-qualified deferred comp plans rising
      Profile of backlit woman against at TV monitor with female symbols on it
      Women outperform men in managing DC plans – Morningstar
      A  Malaysia flag flies in Putrajaya on Sept. 23, 2020
      Malaysia’s EPF ends 2020 up 7.9% at almost $250 billion
    • Michael Herskovich
      BNP Paribas Asset Management names global head of stewardship
      TPT Retirement taps into low-carbon strategies
      Gary Gensler
      Nominee Gensler backs SEC climate risk disclosure
      Emissions from a smokestack in Poland
      Asset managers facing more scrutiny on ESG issues – report
    • Spirit winners
      Prudential honors young people who are helping out
      2 U.K. pension execs take on ESG investing in new podcast
      Donation illustration
      Jefferies will use trading commissions to do good
      Michael Arougheti
      SPACs ride wave as latest investment darling
    • Robert 'Rob' Shafir listens during a Senate Permanent Subcommittee on Investigations hearing in Washington on Feb. 26, 2014
      Sculptor hedge fund hits sixth straight year of outflows
      The WallStreetBets forum on the Reddit Inc. website on a laptop computer and the GameStop logo on a smartphone in an arranged photo.
      GameStop frenzy has hedge fund managers rethinking next moves
      Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management, speaks during the Sohn Investment Conference in New York on May 6, 2019
      Citadel, Point72 back Melvin with $2.75 billion after losses
      Shanghai skyline
      Global hedge funds struggle even in a more open China market
    • Amanda Agati
      PNC chooses new CIO for asset management group
      Full suite of concerns add complexity to 2021 proxy season – ISS
      Chicago Policemen plans search for index fund manager
      A pharmacist administers a dose of the COVID-19 vaccine in Mountain Brook, Ala., on Feb. 21, 2021
      Business optimism grows as vaccinations spread – Fed
    • Amanda Agati
      PNC chooses new CIO for asset management group
      Robert C. Doll
      Bob Doll to retire from Nuveen
      WisdomTree adds U.K. institutional sales director
      Bonaccord takes minority stake in Monroe Capital
    • Illinois pension fund liability jumps 19%
      Xerox to send $130 million to global pension plans
      Evergy to boost pension plans with $132 million contribution
      Occidental Petroleum to pour $170 million into pension plans
    • Amanda Agati
      PNC chooses new CIO for asset management group
      Robert C. Doll
      Bob Doll to retire from Nuveen
      WisdomTree adds U.K. institutional sales director
      Des Mac Intyre
      Channel Capital teams up with former Mellon CEO to launch incubator firm
    • The Charging Bull statue is covered in snow near the New York Stock Exchange on Feb. 11, 2021
      Bain: Private equity managers finish 2020 strong
      Carlyle secures $4.1 billion ESG-related credit facility
      Hamilton Lane raises $3.9 billion for fifth secondary fund
      PSG closes first Europe-focused fund at $1.5 billion
    • AEW chooses head of fund operations and debt finance
      Sebastiano Ferrante and Jocelyn de Verdelon
      PGIM Real Estate turns to staff to fill new roles
      European managers key in on specialist strategies
      Ingrid Jacobs
      Jones Lang LaSalle brings on head of diversity and inclusion
    • Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
      P&I 1,000 largest retirement plans: 2021
      Retirement in emerging markets
      Outlook 2021
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Chicago Policemen plans search for index fund manager
      North Dakota builds on infrastructure investment with $200 million commitment
      Iowa Municipal Fire & Police reveals $95 million in commitments
      ACCESS pool chooses Minerva Analytics for ESG advice
    • Chicago Policemen plans search for index fund manager
      North Dakota builds on infrastructure investment with $200 million commitment
      Iowa Municipal Fire & Police reveals $95 million in commitments
      ACCESS pool chooses Minerva Analytics for ESG advice
    • Financial Auditing Services
      Actuarial Services
      Emerging Market Equity Manager Services
      Securitized Credit Manager Search
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Tesla cartoon
      Don’t confuse wealth creation with retirement saving
      Top 1000 cartoon
      Top 1,000 retirement plans weather storm just fine
      Infrastructure cartoon
      You must go big on infrastructure, Mr. President
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Investment Trends: Looking Ahead Across Equity Sectors
      Rethinking Market and Reference Data Management
      China is embarking on a new stage of growth
      Gold Outlook 2021
    • Sameer Shalaby
      Commentary: Why should investors care about treasury management?
      David Blitzstein
      Commentary: Without a national retirement policy, Americans face a future of pension crises
      Lawrence Cunningham
      Commentary: Gensler should keep Clayton’s pragmatic proxy adviser rules
      My-Linh Ngo
      Commentary: Pension funds and the role of the debt market in the fight against climate change
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      How will gold react?
      To people shaking hands
      P&I Content Solutions
      Lessons From 2020: Today’s OCIO Model Passes a Major Test of Governance
      Sponsored Content By MassMutual
      Leveraging Data to Manage Risk
      Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      0:45
      Private funds weathered 2020 turmoil
      watch video
      0:59
      Secure choice and other retirement plans at a state level
      watch video
      3:33
      P&I 1,000 by the numbers 2021
      watch video
      1:33
      A look at hiring activity in 2020
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
    • POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
      POLL: The Biden administration’s economic plans
      POLL: Retirement issues in 2021
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • By the Numbers for February 2021
      Top Performing Managers of U.S. Stock, 4th Quarter 2020
      Top Performing Managers of Domestic Balanced, 4th Quarter 2020
      Top Performing Managers of Domestic High-Yield Fixed Income, 4th Quarter 2020
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. ALTERNATIVES
March 06, 2017 12:00 AM

Firms at the crossroads: Offer alpha or disappear

Christine Williamson
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Clifford S. Asness sees hedge funds as a good argument for active management — if fees are fair.

    Hedge fund managers have been put on notice: evolve, deliver or die.

    Unless managers produce alpha, diversify institutional portfolios and protect their downside at a fair price, they risk more of the crippling outflows many experienced in 2016.

    Industry bifurcation is inevitable, sources said. Likely survivors will be among the cadre of multibillion-dollar firms cushioned by healthy asset levels and good performance, and skilled niche managers whose chosen strategies often are capacity constrained, precluding management of big capital pools.

    Between the largest and specialist niche managers, numerous midtier managers will be under immense pressure from institutional investor demands for lower fees, an ongoing low-yield environment and increasing complexity of business operations, pushing many out of business by the end of the decade, according to a new report from The Boston Consulting Group.

    “It's a question of the value proposition of hedge funds. If managers are charging 2% and 20% and aren't producing returns, the jig is up,” said Brent Beardsley, managing director and senior partner based in BCG's New York office.

    The impact of net negative flows and performance is already evident in the havoc wreaked on the assets of many hedge fund managers tracked by Pensions & Investments for the year ended June 30, 2016, according to annual survey data.

    The majority — 70% — of the 99 hedge fund firms that returned P&I's survey in 2016 saw assets decline from the prior year. Of those managers, 40% experienced losses of 10% or more and 27% had declines greater than 20%.

    The percentage with asset growth for the year ended June 30 was 28%; 14% saw AUM growth of 10% or more. For 2% of managers, assets were flat in 2016, survey data showed.

    The story was different for the prior year — 73% had higher assets in 2015 than in 2014 and 27% saw declines. The universe for that year-to-year comparison was 75 firms that responded to P&I's survey in both 2015 and 2014.

    Global market conditions in the past two years didn't make it easy for a wide swath of managers to generate the alpha expected by institutional investors paying high fees for market outperformance.

    “Individual hedge fund strategies started suffering poor returns in 2014. In the summer of 2015, active management really started to struggle and on average, alpha turned negative,” said Kent Clark, managing director and head of the hedge fund strategies practice within Goldman Sachs Asset Management, New York.

    “By the end of 2016, after nearly eight years of a global bull market, average hedge fund returns were what you would have expected after adjusting for average beta and performance of most strategies lagged long-only U.S. equities,” he added, stressing that “returns like this generated a lot of unrest among investors.”

    GSAM managed $28 billion in hedge funds of funds as of Dec. 31.

    Taking a hard look

    The disquiet has led many to take a hard look at the hedge funds in their portfolios. “Many institutional investors are questioning what role hedge funds play in their portfolios. They are more routinely dissecting the contribution of alpha and beta returns, how to capture each most efficiently and what to pay for them,” said Michelle Noyes, New York-based chief operating officer of industry group Alternative Investment Management Association.

    Despite a few high-profile “noisy” investor departures from hedge funds, by and large “investors have become more sophisticated and are much better at determining a manager's luck vs. talent,” said an executive at activist hedge fund firm who asked not to be named. “There are still a lot of investors that are making first-time allocations to hedge funds.”

    “Institutional investors are more intent on picking firms in which they have confidence in the manager's ability to generate alpha,” said the executive.

    Ironically, asset owners played a big part in reducing a manager's ability to uncover and exploit sources of alpha, sources said, due to the sheer volume of money invested over the last decade.

    “If you go back 10 or 15 years, hedge funds sprang up when managers left traditional money management companies. But from that early pioneering phase, the hedge fund industry has moved to having so much money to put to work in the markets that it's become much harder to find alpha,” said Bruce Keith, noting institutional investors were responsible for much of the inflows. Mr. Keith is CEO of Infrahedge Ltd., London, a managed accounts provider.

    At the heart of the matter is the question of whether active management can consistently outperform passive strategies. “At fair fees, hedge funds are a more efficient, clearer, risk-adjusted version of active management,” said Clifford S. Asness, managing and founding principal of AQR Capital Management LLC, Greenwich, Conn.

    “We're hearing a lot of rumbling out there about hedge fund fees, which is something we've been talking about for 10 to 15 years,” Mr. Asness said, stressing “hedge fund managers are making too much of their money from being net long, which makes paying high fees even more egregious.”

    Akin to the traditional investment management arena where institutions are moving with alacrity to passive strategies, Mr. Asness said assets are leaving hedge funds for systematic and passive approaches.

    “The last few years have been terribly difficult for active management. Hedge funds are just another type of active management,” said Luke Ellis, CEO of Man Group PLC, London.

    “If active managers can't produce (outperformance), they can't earn fees. It's the same equation for hedge funds,” Mr. Ellis said, noting the result of hedge fund managers not generating alpha will be a “very healthy shaking of the tree. The hedge fund industry has always exhibited an incredibly Darwinian evolutionary process. There have always been fund closures as a result.”

    Man Group managed $34 billion in hedge funds and $12.7 billion in hedge funds of funds as of Sept. 30.

    “Nothing has changed,'' said an executive of a large multistrategy hedge fund firm who spoke on condition of anonymity. “The hedge fund industry has always been an incredibly competitive space where the strongest survive. Capital is taken away from those managers who don't perform and given to those who do.”

    “I think we've reached the point where there's too much money invested in the space but I think more money will flush out in the first part of this year because investors can't tolerate poor performance,” the source said.

    Fewer managers chasing the same sources of alpha around the globe would benefit surviving firms immensely, sources said.

    That's because the vast majority of the 8,300-plus active hedge funds are very small and only “a couple hundred offer a compelling value proposition,” said Jon Hansen, managing director and hedge fund specialist at investment consultant Cambridge Associates LLC, Boston.

    “Because of the trillions invested in hedge funds nowadays, experienced talent is spread thin and much of the capital is crowded around the same opportunities with a highly short-term focus,” said the activist hedge fund executive. “It's a lot harder for most managers to produce alpha in that situation. What's needed is the talent, experience and conviction to do things differently from everyone else, and not many firms have that.”

    Hedge fund gainers and losers

    Ranked by one-year change in assets under management as of June 30, 2016. Assets are discretionary assets managed in hedge funds worldwide, in millions.

    RankManager2016

    assets

    Change,

    2015 to

    2016

    Change,

    2014 to

    2015

     

    1Paloma Partners$5,300 65.6%45.5%
    2AQR Capital Mgmt.$63,030 38.2%44.3%
    3Hitchwood Capital Mgmt.$3,681 33.6%N/A
    4Graham Capital Mgmt.$12,666 27.4%42.2%
    5Two Sigma Investments$27,600 27.2%59.6%
    6Gramercy Funds Mgmt.$3,955 21.7%12.0%
    7Renaissance Technologies$32,000 18.5%5.9%
    8Capula Investment Mgmt.$14,100 15.6%13.2%
    9HG Vora$2,400 14.3%31.3%
    10Birch Grove Capital$797 13.9%58.4%
    11The Children's Investment Fund$12,500 13.6%N/A
    12Marshall Wace1$23,000 13.3%12.8%
    13Saba Capital$1,700 13.3%N/A
    14Winton Capital Mgmt.$33,045 10.9%21.3%
    15Millennium Mgmt.$33,302 9.5%31.3%
    16Pacific Investment Mgmt.$16,979 8.3%-3.2%
    17Ionic Capital Mgmt.$2,700 8.0%19.0%
    18Elliott Management$28,834 7.6%8.6%
    19Nephila Capital$9,983 6.4%N/A
    20Highline Capital Mgmt.$2,856 6.1%17.1%
    21Kepos Capital$2,200 5.3%28.5%
    22Man Group$46,300 4.3%6.5%
    23Tilden Park Capital Mgmt.$3,862 3.5%6.6%
    24Passport Capital$3,900 2.6%-3.4%
    25D.E. Shaw Group$27,018 2.5%9.9%
    26GoldenTree Asset Mgmt.$11,555 2.2%19.2%
    27Farallon Capital Mgmt.$21,000 1.9%0.5%
    28Waterfall Asset Mgmt.$4,200 0.3%N/A
    29Canyon Partners$14,200 0.0%N/A
    30UBS O'Connor$5,600 0.0%3.7%
    31Fortress Investment Group2$13,588 -0.2%-2.4%
    32Bridgewater Associates$102,930 -0.7%13.6%
    33Ivory Asset Mgmt.$2,991 -1.0%18.4%
    34Anchorage Capital$15,600 -1.3%7.5%
    35Ramius$9,082 -1.3%17.3%
    36Davidson Kempner Capital Mgmt.$25,250 -1.4%7.6%
    37Highfields Capital Mgmt.$12,200 -1.6%N/A
    38Napier Park Global Capital$1,881 -2.0%-4.2%
    39Silver Point Capital$7,500 -2.6%N/A
    40Solus Alternative Asset Mgmt.$5,039 -2.6%36.2%
    41Autonomy Capital$3,500 -2.8%2.9%
    42PointState Capital$10,190 -3.0%N/A
    43Moore Capital$15,000 -3.2%4.4%
    44Citadel$24,002 -3.6%18.6%
    45Ellington Mgmt. Group$5,300 -3.6%17.0%
    46Lone Pine Capital$12,400 -3.9%N/A
    47Eton Park$8,500 -5.6%-2.2%
    48BlueMountain Capital Mgmt.$14,099 -5.7%-2.1%
    49Senator Investment Group$8,485 -6.1%17.0%
    50Strategic Value Partners$1,400 -6.7%N/A
    51Magnetar Capital$13,200 -7.7%30.0%
    52Eminence Capital$5,900 -7.8%16.3%
    53Samlyn Capital$5,000 -9.1%26.7%
    54Viking Global Investors$19,780 -9.4%5.7%
    55Brenner West Capital Partners$1,305 -9.8%N/A
    56Hutchin Hill Capital$3,700 -9.8%78.3%
    57King Street Capital Mgmt.$19,000 -10.0%-5.0%
    58Contrarian Capital Mgmt.$3,140 -10.3%N/A
    59Marathon Asset Mgmt.$8,700 -10.3%-1.7%
    60Three Bays Capital$1,600 -11.1%N/A
    61MKP Capital Mgmt.$7,391 -11.7%-4.0%
    62Cevian Capital$12,619 -11.8%-4.9%
    63Highland Capital Mgmt.$1,061 -11.8%55.2%
    64Blue Ridge Capital$7,000 -12.5%-11.1%
    65Conatus Capital Mgmt.$2,000 -12.9%-23.4%
    66Blue Harbor Group$3,100 -13.4%11.9%
    67BlackRock$28,600 -14.3%-2.6%
    68Goldman Sachs Asset Mgmt.$13,000 -14.5%5.6%
    69Pine River Capital Mgmt.$8,100 -14.7%-9.4%
    70Carlson Capital$8,354 -14.8%11.4%
    71York Capital Mgmt.$18,300 -15.7%0.5%
    72Seer Capital Mgmt.$1,630 -16.0%N/A
    73Folger Hill$1,000 -16.7%N/A
    74Hudson Bay Capital Mgmt.$2,700 -17.3%41.1%
    75LibreMax Capital$2,700 -17.3%-0.7%
    76Tudor Investment Corp.$11,000 -17.9%7.2%
    77Glenview Capital Mgmt.$9,460 -19.6%27.9%
    78CQS$11,600 -19.7%7.2%
    79Capstone Investment Advisors$2,732 -20.0%32.6%
    80Wexford Capital$1,600 -20.0%N/A
    81Structured Portfolio Mgmt.$2,120 -20.5%N/A
    82DW Partners$4,100 -21.2%-21.2%
    83Greywolf Capital Mgmt.$1,385 -21.4%N/A
    84Perella Weinberg Partners$1,125 -21.8%-32.4%
    85Kingdon Capital Mgmt.$2,063 -22.8%-3.8%
    86Finisterre Capital$1,850 -23.3%N/A
    87Aurelius Capital Mgmt.3$3,605 -24.2%5.8%
    88Tricadia Capital Mgmt.$3,100 -24.4%16.7%
    89400 Capital Mgmt.$1,475 -25.1%86.9%
    90Taconic Capital Advisors$6,190 -25.7%-9.0%
    91Fir Tree Partners$9,600 -26.6%0.4%
    92Greenlight Capital$8,600 -27.1%N/A
    93Brevan Howard Asset Mgmt.$19,400 -28.1%-25.0%
    94Och-Ziff Capital Mgmt.2$26,100 -31.2%11.6%
    95JANA Partners$7,435 -37.0%7.2%
    96Impala Asset Mgmt.$1,482 -46.8%-11.6%
    97Salient Partners$1,781 -57.6%N/A
    98J.P. Morgan Asset Mgmt.$6,446 -77.3%10.4%
    99Claren Road Asset Mgmt.$836 -80.1%N/A

    Notes: 1 Data are as of April 30, 2016, from external source. 2 Data are as of June 30, 2016, from company earnings report. 3 Data are as of July 31, 2016, from survey.

    Source: Pensions & Investments survey unless otherwise noted

    Surviving the shakeout

    Among large hedge fund firms likely to skillfully plumb a less-competitive alpha landscape, sources pointed to AQR Capital Management, The Baupost Group LLC, Bridgewater Associates LP, The Children's Investment Fund Management (U.K.) LP, Citadel LLC, Elliott Management Corp., Renaissance Technologies LLC, Rokos Capital Management LLC and Two Sigma Advisers LP.

    Smaller, newer and niche managers include Autonomy Capital, Park Presidio Capital LLC, Pelham Capital Management LLP and Redwood Capital Management LLC.

    The success of these firms puts them at an advantage in terms of generally not having to concede to demands for lower fees, observers said. A number of the largest, most institutional managers closed their strategies to new investors some years ago to maintain performance.

    “We're interested in hedge fund managers that are focused on a particular asset space as opposed to being huge asset gatherers. These specialized managers often are closed or semi-closed and very protective of their strategy's capacity. And they definitely are very performance focused,” said Tracy McHale Stuart, partner and CEO of hedge funds-of-funds manager Corbin Capital Partners LP, New York.

    “A surprising number of our "nichey' managers don't want press exposure,” she added.

    Goldman Sachs' Mr. Clark said “there are two groups of hedge fund companies. The successful firms are not making changes because they don't have to. The world hasn't changed for them.”

    The multistrategy hedge fund executive who declined to be named said the firm's funds are closed and fee concessions haven't been made. And because of institutional investor interest, the firm — like many other high-demand companies with closed funds — does offer capacity at regular fee levels to “good partners.” Those are desirable institutional investors, particularly corporate pension funds, endowments, foundations and sovereign wealth funds.

    By contrast, many members of Mr. Clark's “other group” of managers with declining AUM, performance problems or out-of-favor strategies are being pressured by asset owners to renegotiate both management and performance fees as well as other contract terms.

    Last year, institutional investors got more assertive and pushed managers on a variety of issues, said Steven B. Nadel, a partner in the hedge fund practice of law firm Seward & Kissel LLP, New York.

    Demands ranged from more liquidity, performance hurdles, multiyear incentive schedules and managed accounts to funds of one and customized strategies such as a partial investment sleeve of a multistrategy fund, Mr. Nadel said.

    The problem, Mr. Nadel said, is that “costs are rising for hedge fund managers, especially for institutionally oriented firms, in every aspect of their businesses including cybersecurity, IT, record keeping, artificial intelligence, rent and overhead. The question is how managers can deal with higher costs when investors want lower fees. The only thing they can do is raise and maintain assets in order to meet increased expenses.”

    Making changes

    But managers are listening to institutional investors and making changes.

    To hold on to assets, Cambridge Associates' Mr. Hansen said he's seen a “180 in the market in the past year. Years ago, when we engaged a hedge fund manager on the issue of fees or alignment, the manager thought, `If I do this proactively, it will be taken as a sign of weakness.' Conceding is not considered so dangerous any more.”

    Mr. Hansen said he and his colleagues have had “a lot of success” in getting management fees down because “as returns get lower, that fee really eats into an investor's return. We've been able to get managers to really focus on what it costs to run their business and lower their fee accordingly. The management fee is the capital the manager needs to run the business, not a source of profit.”

    The next evolutionary step for managers is to start focusing on fairer fees by introducing sliding scales or performance hurdles, Mr. Hansen said, adding the effort is “still a work in progress. It's to no one's advantage if we disadvantage the manager by requiring a lower performance fee,” thereby reducing the incentive for portfolio managers to strive for performance.

    Other stay-alive adaptations being contemplated include new fund structures such as hybrid private equity-hedge fund vehicles that require a three- to five-year lockup in exchange for lower feesproviding investors with a good illiquidity premium, said Douglas A. Smith, a New York-based senior investment consultant, hedge fund manager research with Willis Towers Watson & Co.

    Other possibilities include concentrated funds of particular alpha sources and developing co-investment opportunities for institutional investors, Mr. Smith said.

    Success and survival for midtier hedge fund companies depends to large degree on the manager's self-assessment of skills and value to institutional investors.

    “Good questions for all hedge managers are: What return can you produce? When? How? And for how long?” said Kevin P. Quirk, principal, Casey Quirk, a practice of Deloitte LLP, Darien, Conn.

    “Hedge fund managers have an opportunity to define what kind of return they can provide that will help institutional investors meet or improve return expectations,” Mr. Quirk stressed, adding “the next three years will be very interesting in the hedge fund industry.”

    Related Articles
    Table: Hedge fund gainers and losers
    Hedge fund fees – a perfect solution
    Hedge fund firms start 2016 with whimper, end with bang
    Complaints aside, ETFs are in hedge fund portfolios
    Hedge fund fees – a perfect solution
    AI going to head of the class
    Man Group appoints president of Americas business
    Passive investing set to impact Treasuries market
    Hedge fund Eton Park to close after assets fall
    Citadel picks permanent head of commodities unit
    Integrated technology: unlocking alpha through greater efficiency
    Hedge fund assets reach another high in first quarter bolstered by March inflows
    Fortress Investment Group's assets inch up for quarter, dip for year
    GoldenTree hires managing director to lead new Sydney office
    Pine River is said to close master fund; Conatus shuttering as Stemerman makes …
    Lone Pine's Mandel to step back from fund management in 2019
    Kingdon Capital appoints president
    Schonfeld Strategic Advisors to acquire Folger Hill Asset Management
    Rokos Capital Management appoints new CEO
    InfraHedge appoints new CEO
    Recommended for You
    BentallGreenOak agrees to acquire Metropolitan Real Estate Equity
    BentallGreenOak agrees to acquire Metropolitan Real Estate Equity
    Aviva Investors promotes from within for real assets CIO
    Aviva Investors promotes from within for real assets CIO
    More alts managers seek expansion to retail market
    More alts managers seek expansion to retail market
    How will gold react?
    Sponsored Content: How will gold react?
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Rethinking Market and Reference Data Management
    Investment Trends: Looking Ahead Across Equity Sectors
    China is embarking on a new stage of growth
    Gold Outlook 2021
    Shifting DC Times - Winter 2021
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center