Asset AllocationFebruary 3, 2020

More Active Managers May Make a Comeback This Year: Mercer

Hedge funds and other active strategies still play a role in diversifying risk in client portfolios, says firm’s Hyman.

Reported by Sarah Min

More active managers may stage a comeback this year, says Mercer. The consulting firm said that investment strategies that have largely fallen out of favor with clients play a big role in diversifying risk in portfolios.

“We know there’s a lot of movement toward passive strategies that has reduced overall fees that clients are paying,” David Hyman, partner and senior investment consultant at Mercer, told Chief Investment Officer, discussing findings from a report released last week.

“But we believe that the marketplace may be choppy, and you may begin to see outperforming active managers,” said Hyman.

One type of actively managed vehicle, the hedge fund, became popular with investors by promising downside protection for pensions and endowments spooked by riskier investments following the financial crisis.

But hedge funds in recent years have struggled to keep pace with broader indexes like the S&P 500, thanks to the longest market recovery in US history. In the past 12 months, hedge funds posted just 7.4% in returns—or less than one-third the S&P 500’s gains of 27%, according to Bloomberg.

Some hedge fund clients have also soured on these vehicles due to their steep management fees, typically the “two and twenty” standard in the industry. That means investors pay managers 2% on assets managed, and another 20% on any gains in the portfolio.

Disappointed investors in 2019 redeemed roughly $100 billion from hedge funds. And more hedge funds closed last year than opened.

One piece of good news for hedge funds: That trend seems to be reversing, as institutional investors again seek to manage their risk in the event of a market downturn. Even though hedge funds’ 7.2% average last year wasn’t sterling, it showed improvement, far better than their 0.7% loss in 2018. One hedge fund consultant, Don Steinbrugge, CEO of Agecroft Partners, predicted that pension funds will increase their allocations into the asset class this year.