Hedge fund managers tell David Walker pension funds could face stronger competition when investing in their products
He said the proximity, or sophistication, of ultimate contributors to funds should also be considered.
For example, funds of funds might pay external capital raisers – possibly at private banks – upfront to gain assets. But because the manager had little or no proximity to the actual end-investors, they may have been unable accurately to explain their strategy and return expectations.
“The final investor then might not have the same depth of understanding, so when the fund goes through rough periods – which many did in 2008 – the investor is more likely to want to take their money out than if they had had a more direct relationship with the manager.”
Pulling cash
Another issue facing managers is the difficulty – nigh impossibility – of categorising investors.
Many foundations and endowments, that were widely held as stable, pulled cash in the crunch when squeezed by private equity capital calls and needing to rebalance into shares and bonds that fell further than hedge funds. Funds of funds defrauded by Bernard Madoff had to encash billions of dollars of client money rapidly. And some Middle Eastern sovereign funds exited so as not to be seen as supporting ‘the bad guys’ as regulators curbed shorting.
Aldrich said: “Most hedge fund managers have welcomed a diverse institutional investor base into their funds, which, having completed their extensive due diligence, characteristically are long-term and committed investors. Both sides need to undertake checks to ensure that this is indeed the case.”
It is unwise to reject from the outset any category of investors, counsels Liability Solutions’ Watkins.
“Managers being irritated and complaining they will not take investors back shows they do not understand the pressures on investors, or have a full relationship with them. I have not met a fund manager who did not think it an affront when investors redeemed. But managers need to develop a good relationship with, and understand problems of, investors.”
Senior said informing and updating allocators directly can be key to keeping them. “This may take more time upfront, but you end up being able to shape that investor’s understanding and expectations of returns, and do the marketing in your own words. Investors understanding more, leads to stickier capital.”
