Hedge fund industry must change or risk losing business
Hedge funds are facing structural headwinds, and if managers don’t up the ante and change their approach to investing, they may lose business, according to a new research paper by Willis Towers Watson.
The research paper suggested that the competitive advantage delivered by hedge funds is being eroded by structural constraints, particularly the industry’s focus on “enterprise risk” rather than investment risk.
And, despite the sustained equity bull market and muted volatility in recent years contributing to lower alpha, data suggested that hedge funds aren’t assuming enough risk to deliver attractive performance in any environment.
“Simply assuming that the macroeconomic situation will improve and boost returns is a strategy of hope, and we’re urging investors to adopt a new approach to ensure they’re selecting the right manager, mandate and fee structure for their hedge fund portfolios,” said Sean Hollins, investment consultant and Australian hedge fund researcher.
To change their approach, the paper said that given managers were rarely best-in-class across multiple disciplines, fund selectors should avoid over-diversified funds, and instead identify managers that possess a unique and competitive advantage in a precise area and isolate this skill.
“This might involve carving out the best elements from flagship/multi-strategy vehicles, free from the lower-conviction ‘risk management padding’ that can suppress returns,” said the firm.
They also said investors should collaborate with hedge fund managers and shift their focus from that enterprise risk back to investment risk.
“If these managers don’t adjust their approach there will be little if any business for them here,” said Collins.
AUTHOR
Anastasia Santoreneos
Recommended for you
Some 42 per cent of CEOs say they are actively reinventing their business to stay relevant in the next decade, with consumer services the most common choice for asset and wealth managers.
Former Ophir Asset Management chief executive, George Chirakis, has joined private equity manager Scarcity Partners, while the asset manager has appointed a replacement from Macquarie.
Australian Unity has appointed a fund manager for its Healthcare Property Trust, joining from Centuria Healthcare, as it restructures the product with a series of senior appointments.
Financial advisers nervous about the liquidity of private markets funds for their retail clients are the target of fund managers launching semi-liquid products which offer greater flexibility and redemptions.
