Hedge fund managers tell David Walker pension funds could face stronger competition when investing in their products
Before the crunch, many hedge fund managers expanding their capital base regarded pension schemes as the non plus ultra of investors. That is changing now, as managers place a stronger focus on diversifying their investor base.
Before the crisis as the $2trn industry institutionalised, its original supporters – wealthy individuals and their advisers – were overshadowed by pension allocators who were viewed as more desirable, long-term investors.
This seemed vindicated in the crunch as retail clients made over 80% of all hedge fund redemptions, according to research by Bank of New York Mellon.
David Aldrich, BNYMellon managing director, said: “There was too heavy a reliance on high net worth investors, many of whom did not have a deep enough understanding of alternative investments and for whom losing capital in hedge funds was a misunderstood risk.”
However, managers mention a number of seminal moments in the crisis, after which they recognised the benefit of diversifying investors.
One was the mass of withdrawals retail investors made in the six months from September 2008 – “they pulled the trigger at the first sign of trouble,” one manager said at the time.
Another such moment was endowments and foundations redeeming to meet capital calls from private equity managers, around the same time, while other institutional allocators reduced hedge fund weightings to rebalance equity holdings which had fallen over twice as sharply in 2008.
Overall, hedge fund managers realised no one investor group could be relied upon to be perennially stable.
Not welcome
Some investors who left have not been welcomed back and some funds have been so selective, even large institutions must provide references just to meet the managers, one large European investor said.
Practitioners stress fund managers – and funds of hedge funds – still welcome pensions, but they now focus as much on having diverse investors, categorised for example by region, type and investment horizon.
Edgar Senior, global co-head of capital services for Credit Suisse in London, added stability also benefits investors. “They want to know in a co-mingled fund there is diversification, one investor does not own 70% of fund assets and other investors are sophisticated and not people to churn or run in and out of funds.”
