Australia's Sunsuper Seeks Small Hedge Fund Managers

(April 27, 2011) — Officials at the $19.4 billion Australia superannuation fund Sunsuper may be leaving mega hedge fund managers for smaller ones.

“A lot of the newer pension money from US and Australia is going to the mega funds, but I personally am happy to take money off them. I don’t see how a multi-strategy fund with $25 billion or $35 billion can continue to add sufficient alpha,” portfolio manager Bruce Tomlinson said at an Opalesque 2011 Australia Rountable report on the hedge fund industry. He added that for a scheme, transparency and contact with decisionmakers often become a problem with a mega hedge fund. “It’s just not the same as being 10% or 15% of a manager’s capital,” he said.

Tomlison noted that as mega funds — which were established about two decades ago — are beginning to experience “generational change issues,” it is prudent to invest with a range of managers and not solely with mega funds.

Neel Mehta, a consultant on Towers Watson’s hedge fund research team, acknowledges some of the advantages of larger funds, noting that while bigger doesn’t always mean better, large hedge funds will clearly be the beneficiaries as pensions move toward the asset class.

“Larger funds are already known in the space and are thus likely to experience more inflows — while it is human nature for people to feel more comfortable when they see others are invested in a certain fund, this is clearly not a reason to make an investment and investors need to make sure they are doing their own work,” Mehta told aiCIO. “From our perspective, shunning big hedge funds is not how we would go about advising our clients,” he continued, acknowledging that he has witnessed clients paying more attention to the growing number of hedge fund startups.

Mehta noted that in considering the factors that drive hedge fund managers, mangers of larger funds are often more concerned about management fees and seek to avoid excessive volatility and drawdowns. On the other hand, managers of start up hedge funds — which have become more prevalent largely due to the 2008 financial crisis and greater turnover within the industry — are looking to develop a reputation and attract clients. Thus, he said, smaller managers are generally more dependent of performance fees to generate income. “So, while interests are often more aligned with smaller hedge funds in terms of performance, schemes also need to keep in mind the risks of smaller funds. It would be foolish to completely shun the large guys, since they have more experience running hedge funds, but it’s important for schemes to analyze the strategies behind both large and small hedge funds and choose the right one accordingly,” Mehta said.

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