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AIMA bares its soul – hedge funds are still delivering
(pictured: Jack Inglis)
Hedge funds don’t rate highly in the court of public opinion, said Jack Inglis as he opened the annual AIMA Forum in Sydney. And their image is not helped by the media. But the truth about what hedge funds can deliver is far more nuanced than that.
Inglis provided a warts-and-all look at the industry, as published in the AIMA Australia special newsletter, over the past 25 years – or since the global Alternatives Investment Management Association was launched in 1990. The London-based chief executive told a record attendance (estimated at 410) at the Forum last week that over the long term there was no debate – hedge funds have outperformed other asset classes.
But it was easier to describe what a hedge fund looked like in 1990. There were four main categories then: global macro, equity hedging, event driven and relative value. Today, there are about two dozen. As with other asset classes, no one category delivers all the time, bit as a group they tend to better than the rest.
“The assumption with hedge funds is often that they take more risk,” Inglis said. “But they don’t. Hedge fund volatility is much more like that of the bond market rather than equities.”
However, after their excess returns above benchmarks climbed steadily from 1993, peaking at 139 per cent in 2011, they have slipped back. Hedge funds as a group have tailed off in the past five years.
Looking at why this may have occurred, Inglis said there were several possible factors:
- The generally lower investor appetite for risk over the past few years may be affecting performance
- Too much money may be chasing too few opportunities – there was definitely some evidence of crowding. For instance, the top 10 positions in the average hedge fund account for 70 per cent of the portfolio but the top 10 positions in the average mutual fund account for 30 per cent.
- But hedge funds still represented only a small part of total global financial assets – about US$3 trillion out of more than $300 trillion. In equity markets, hedge funds make up just 4 per cent. “It’s too convenient an excuse to blame crowdiness,” he said.
- Beta exposures to major markets are declining.
- The real performance question is not the headline number but the risk-adjusted returns. “The majority of hedge funds still improve on a portfolio’s efficient frontier,” according to a report by Barclays Capital Solutions last month. According to a recent Mercer survey, in 2015 the average hedge fund of fund beat both the 60:40 and 70:30 portfolios of the average pension funds.
- Asset flows may have slowed and look like they have gone into reverse in the first half of 2016. Research is unclear though. Prequin says there was a total $34 billion in outflows in the six months but Eureka Hedge calculated a net inflow. And outflows are mixed via strategy – “it’s not a wholesale flight; redemptions are selective”. For instance multi-strategy funds and CTAs (trend following strategies) have had strong inflows. The 10 managers with the largest outflows delivered, on average, a negative annual return of 4 per cent. The 10 managers with the largest inflows delivered a ;positive 7 per cent return.
Similarly, with respect to investor sentiment, the overall results are negative but this is not evenly spread between strategies. According to the Barclays survey, 61 per cent of investors say hedge funds have not met their expectations, or mostly not. Those whose expectations have been met totaled 24 per cent. But for CTAs 90 per cent said their expectations were met. Of those who redeemed, 46 per cent re-allocated to other hedge fund strategies, while 19 per cent reduced their overall hedge fund allocation. “None of this says to me that there’s a flight to the door,” Inglis said.
On the vexed subject of fees, headline numbers were also misleading, according to the Barclays report. Managers in all strategies had discounted both their management fees and performance fees. The average rack rate had fallen from the famed “2 and 20” to closer to “1 and 15”. A Prequin report said that 60 per cent of investors believed there had been a significant shift in their favour with fees in recent years.
“In the main,” Inglis said, “I think hedge funds are delivering. Not all of them, and not all of the time. So careful selection will be rewarded.”
