Money managers under the microscope
Return to sender
The rush by traditional asset managers to embrace absolute return products has failed to impress investors, who are now switching to cheaper, passive investing. But what will fill the revenue hole left by these high margin products is far from clear.
Aymeric Poizot, a senior director at Fitch Ratings, points out that many of the alternative offerings developed by traditional managers in the boom years have been quietly wound up, or had their resources reduced. For example, Fortis Investments has closed some of its internal hedge funds, whilst heavy redemptions have hit alternative offerings at Credit Agricole. SSgA also wound up its own hedge fund unit at the end of 2007.
Other mainstream managers have reappraised their 130/30 offerings – long/short equity products which Poizot says have at best just delivered benchmark performance. Investors have been voting with their feet, switching to money market funds last year, and passive investing this year.
This is hitting fees at traditional asset management houses, as 100 billion euros of money market funds are needed to generate the same revenues as 10 billion euros of high margin products. “When the market is up, no one cares about paying 80 basis points for beta,” said Poizot at a briefing on Tuesday. “But when the market is down, investors question whether the fees are justified.”
Some managers like Natixis Global Asset Management have opted to purchase hedge fund specialists to overcome any cultural or operational issues which may have bedevilled running absolute return products in-house.
Poizot said that he was not sure having an absolute return process within a traditional organisation would be viable going forwards, and that in any case, absolute return would have to change. He pointed out that many absolute return products were sold as “Libor plus”, when they should have been more about capturing two-thirds of any upside and preserving some capital in a down market.
“Absolute return was more a marketing concept than a reality,” he said.