Put Into Perspective: Assets Of Fund Of Hedge Funds Grow In US But Shrink Abroad by Skenderbeg Asset Management
“Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems ‘hard’ at the time is usually, over time, right.” – James P. Arthur Huprich
Equity Market-Neutral Strategies Top Investor Wish Lists
Equity market-neutral strategies top hedge fund investors’ wish lists for the year ahead, while credit strategies are the least popular, according to Credit Suisse research.
Value Partners Asia ex-Japan Equity Fund has delivered a 60.7% return since its inception three years ago. In comparison, the MSCI All Counties Asia (ex-Japan) index has returned just 34% over the same period. The fund, which targets what it calls the best-in-class companies in "growth-like" areas of the market, such as information technology and Read More
In its annual hedge fund survey of 369 institutional investors, Credit Suisse found equity market-neutral – fundamental and equity market-neutral – quantitative were the two most popular strategies, with 34% and 30% of investors reporting demand for each strategy respectively. This is up from the demand of 18% for each strategy reported last year.
Here’s The Evidence That You Get What You Pay For When Investing In Hedge Funds
The past two years have been incredibly underwhelming for the hedge fund industry. Hedge funds fell by 3.64% on average in 2015 and by 0.58% in 2014, according to data from Hedge Fund Research.
That said, there has been a great deal of dispersion between the best performers and the worst performers, with some finishing 2015 up by more than 50% and others finishing the year down by more than 20%, according to data from HSBC.
Naturally, the less-than-stellar performance of the hedge fund space as a whole has renewed the heated debate about hedge fund fees. Historically, hedge funds have been paid through a compensation structure commonly known as the “2 and 20,” which means they charge investors 2% of total assets under management and 20% of any profits. The fees can vary from fund to fund, with some charging less and others charging more, such as “3 and 30.”
In a new report, Barclays’ capital solutions group suggested “2 and 20” may be becoming a “relic of the past.” Less than a third of the 110 hedge funds the bank surveyed for its report had a management fee higher than 1.75%.
The Fees Are Worth It
The Barclays report also analyzed the relationship between headline fee levels and performance to figure out whether more expensive hedge funds outperformed funds that were comparatively less expensive. After examining the net returns of a large number of hedge funds across different strategies for one year (Q3 2014 to Q3 2015), Barclays found that the best-returning quadrant was the one representing managers with the highest overall fees (2%+, 20%+).
“While a flaw in our analysis is that we looked at only a one-year period, the data does suggest that the best managers are confident of being able to generate strong returns and therefore demand higher fees,” the report said. Of course, this comparison focuses only on hedge funds, so it doesn’t compare the performance of hedge funds with that of much cheaper mutual funds or index-tracking funds.
Still, if you are going to put money into a hedge fund, it seems you get what you pay for.
Where The Black Swans Hide & The 10 Best Days Myth
How much effect do these outliers have on long term performance? Can the investor prepare for these anomalies, or are they truly ‘black swans’ that cannot be managed? In this issue we examine numerous global financial markets on daily and monthly time frames. We find that these rare outliers have a massive impact on returns. However, these outliers tend to cluster and the majority of both good and bad outliers occur once markets have already been declining. We critique the “missing the 10-best-days” argument proffered by advocates of buy and hold investing, demonstrating that a significant majority of the 10 best days and the 10 worst days occur in declining markets. We continue to advocate that investors attempt to avoid declining markets where most of the volatility lies, and conclude that market timing and risk management is indeed possible, and beneficial to the investor.
Fund-Of-Hedge-Fund Assets Grow In US But Shrink Abroad
North America-based funds-of-hedge-funds (“FoHFs”) underperformed their counterparts in Europe and Asia in 2015, but still managed to grow their asset base, even as European and Asia-Pacific funds saw their assets decline. These were the main findings of Preqin’s “Fund of Hedge Funds Outlook,” the featured article from the March 2016 Hedge Fund Spotlight, which reports that North America-based FoHFs saw their assets grow by $9 billion in 2015, continuing a streak of asset growth that dates back to 2011. Europe- and Asia-based FoHFs, by contrast, saw their AUM decline by enough to sink the global total by $12 billion.
The Harm In Selecting Funds That Have Recently Outperformed
We empirically investigate the investment results of commonly used fund selection strategies that involve redeploying assets from underper-forming to outperforming funds. Based on portfolios constructed using US mutual fund data over typical three-year evaluation periods, we find that investors who chose funds with poor recent performance earned higher excess returns than those who chose funds with superior recent performance. Our findings pose a challenge for asset owners: If past performance is used at all in selecting funds, it is the best-performing funds that should be replaced. Realistically, however, a policy of replacing successful funds with poor performers is unlikely to gain widespread acceptance. Instead, the practical implication of our paper is that asset owners should focus on factors other than past perfor-mance. We offer alternate criteria for selecting funds.
Investors Add To Hedge Fund Bets Amid Market Volatility
Investors pumped more money into hedge funds in March in seeking to shelter from the continued market volatility, data from hedge fund administrator SS&C GlobeOp showed. The SS&C GlobeOp Capital Movement Index, which calculates monthly hedge fund subscriptions minus redemptions at the start of each month, rose 0.82 percent in March, it said in a statement, after a gain of 0.59 percent in February.
“The March data continued the trend of recent months in which inflows have held fairly steady while outflows have run below year-ago levels,” said Bill Stone, Chairman and Chief Executive Officer, SS&C Technologies. Flows into and out of hedge funds normally occur at the start of the month or quarter. “During this time markets experienced significant volatility, including several sharp downturns,” Stone added.
5 Big Mistakes To Avoid When Choosing An Investment Advisor
Choosing an investment advisor is a very important decision that many investors rarely give much thought to. Some simply make a choice based on the recommendation of a friend or family member, while others stumble upon an advertising campaign or other flashy marketing piece. In my experience, people spend more time researching their next TV or computer purchase than they do in selecting the professional that will steward their nest egg. This is probably because there is instant gratification in the purchase of a new toy rather than the months and years it will take for an investment advisor to prove their worth.
Over the years I have spoken to hundreds (if not thousands) of investors that are searching for the right fit in managing their assets. Below are some of the biggest mistakes I see being made in this decision process.
1. Obsession with fees.
The media and many industry experts have done an outstanding job in calling out the excessive fees that have plagued Wall Street for generations. Products like annuities, 401(k)’s, actively managed mutual funds, and even hedge funds have been derided for their disproportionately high fee structures. This has led to the trend of investors swapping these products for low-cost exchange traded funds and automated investment programs with rock-bottom expenses.
While this subject has been in the spotlight for years, the pendulum has now shifted to an obsession with every basis point of embedded expense. Now things like the difference between an $8 trade and a $9.99 trade are considered huge controversies for investors considering two different online brokers. Similarly, the difference between an advisor charging 0.90% and an advisor charging 0.80% can often sway an investor to pick one over the other.
I’m going to let you in on a little secret. In the long run, neither of those decisions is going to matter as much as the securities your money is invested in or the advice you are given during a tough stretch in the market. Fees are important, but the continued democratization of the industry is leading to some of the lowest overall expenses in the history of the game.
Don’t confuse cheap with value. There is a huge difference between buying the cheapest car on the lot versus the car with the best value for the options that come with it. You get what you pay for.
2. Fixation on experience.
This section should really be labeled a focus on age. For some reason, older advisors are considered to be much smarter and more reliable than their younger peers. They have seen and done it all, so they must be the best choice when comparing two different professionals. A little gray hair goes a long way in creating a heartwarming sense of knowledge and wisdom.
I’m 34 years old. I was not even 6 years old during the 1987 crash. Crazy, right?
Fact: My age has nothing to do with my ability to successfully navigate my clients through the next crisis in the market. It may even provide a better perspective because I’m not constantly looking over my shoulder and making ad nauseam comparisons to the markets of old.
Every cycle in the market is different. Period. Today’s market is far different from the 80s and 90s just based on the sheer speed of information and volume of trading.
The only thing that will be a constant throughout every generation is the predictable swings between fear and greed that are a function of the human psychology. Market’s change, people don’t.
3. Preoccupation with short-term historical performance.
This is a question I get a lot – How did you guys do last year?
If I said we were up 5%, 10%, or even down 2%, how could you possibly frame that response in the context of your individual risk tolerance and expectations? In addition, it should be understood that this current year in the market isn’t going to look anything like last year.
I fully understand the desire to know an advisor is at least keeping some level of correlation with the overall market. Nevertheless, there are a tremendous number of circumstances that need to be explained before performance will even make sense. In addition, every client’s portfolio will be slightly different based on their unique needs, timing, risk tolerance, cash additions or withdrawals, and other exogenous factors.
In order to understand these nuances, some of the following questions may be appropriate:
- How do you construct your portfolios?
- What does your portfolio look like now?
- What benchmark do you use to gauge your performance?
- What was your max drawdown in ___ year or in the history of your strategy?
- What factors go into making changes to the portfolio?
- Who is the person or committee that makes these decisions?
- What type of macro events may lead to you changing your stance in the future?
- Is your own money invested in the same place as mine?
The responses (or lack thereof) to these questions will help you understand the level of knowledge your advisor possesses about building a sensible portfolio. This may shock you, but many investment advisors are better salesmen than money managers. Make sure that you can identify the difference between the two before you turn over your hard earned nest egg to anyone.
4. Assuming all advisors are the same.
Assumptions in investing can be costly and often lead to expectations that a current trend will continue indefinitely. I often have investors dejectedly explain their horror stories with past advisory relationships that led to ill-timed investments, high fee products, and an overall destruction of trust. This creates a sense of paranoia that the same thing will happen with the next professional they hire to manage their money.
Fear of making another costly mistake isn’t something that should hold you back from finding the right person to oversee your assets. Make a resolution right now to break the cycle.
See full PDF below.