(December 21, 2012) — The hedge fund industry has certainly suffered its blows, but a rosy year looks set to be in store for the sector, says Tim Barron, the chief investment officer of consulting firm Segal Rogerscasey.
During the next five years, he expects hedge funds are to likely receive investments of up to $1 trillion. “Fund managers need to be prepared for those assets, particularly if they’re reaching out to public and corporate pensions,” he says, noting that he foresees particular opportunity from those types of institutions. The reason for the optimism, in a nutshell: Institutional investors are not getting the returns they need elsewhere.
“We want more of the portfolio to offset our equity risk. More things like infrastructure, natural resources, some hedge funds,” Mike Mueller, deputy CIO of the Oregon State Treasury, told aiCIO earlier this year, summarizing the sentiments of many investors in pursuit of hedge funds and alternatives more broadly.
At the same time, asset owners are increasingly skeptical of the hedge funds they invest in–a skepticism fueled by the financial crisis and the flurry of lawsuits that have emerged following it. Just this week, Level Global Investors LP co-founder Anthony Chiasson, who left SAC Capital Advisors LP to start his hedge fund, and former Diamondback Capital Management LLC portfolio manager Todd Newman were convicted in an insider-trading scheme that reportedly gathered more than $72 million. “Headline risk certainly exists in the hedge fund world, and that risk takes a little bit of the luster off hedge funds as an asset class,” Barron asserts. “It also drives money into the bigger-name, larger hedge fund players that usually have the discipline and compliance in place to minimize that impact.”
The solution to minimizing the prevalence of such lawsuits, according to Barron? Firstly, institutional investors need to do their homework and demand transparency, and they have the clout to do it. “The institutionalization of the hedge fund industry is a significant change. It’s going to be tough on hedge funds–they need to get used to giving more transparency.”
Secondly, regulators must continue to be diligent in helping investors achieve greater transparency from hedge funds. If not, Barron notes, “investors will be discouraged from participating in areas where they see potential conflict and compliance issues.”
Another theme Barron says he has been increasingly hearing from his clients–one he expects to become louder in 2013–has centered on the survival of the hedge fund-of-funds model as a growing number of institutions seek to invest directly. “The pressure on hedge fund-of-funds largely stems from the high fees involved,” Barron explains, highlighting that direct investing in hedge funds among institutional investors has become more mainstream as the industry has matured.” Muted hedge fund returns following the financial crisis have added fuel to the fire in terms of direct hedge fund investing, he says.
“We don’t believe that hedge fund-of-funds as a concept is dead–they still play an important role, but they’re forced to become more customized, or they’ll suffer,” Barron notes. “Plan sponsors will increasingly seek the larger, established names where they can be comfortable that their assets will be managed by someone who has the operational capability and the communicating capability to mange those assets.”
Barron’s outlook on what type of hedge fund managers have the most potential to profit in 2013? “Long-short equity folks can benefit, because as people move away from pure equity beta, which has been very volatile and difficult to manage, the long/short guys can take advantage of that as an alternative to equity.”
Meanwhile, event-driven hedge fund managers can benefit from investors moving away from fixed-income, seeking credit long/short or distressed debt strategies, he concludes.
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Contact the writer of this story:
Paula Vasan
Managing Editor, aiCIO
646-308-2742
pvasan@assetinternational.com
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