Money managers under the microscope
Among the side-effects of the financial crisis, the importance for European wealth managers and other intermediaries of both managing investors’ expectations and understanding fully what those expectations are, has been underlined.
This is not entirely new. The rise of absolute return products largely reflects intermediaries’ efforts to deal directly with client expectations that, for many, have taken a severe blow. It is worth looking back at the level of inflows to funds seeking absolute returns before and after 2008 (the nadir for the industry in terms of sales activity) to see how this has evolved.
The data not only show the relative level of in- and out-flows for absolute return funds in Europe since 2005, but serves as a means to illustrate how activity has shifted in Europe.
Up to the middle of 2007, investors in Italy, Switzerland and France were strong supporters of absolute return. However the failure of many of these funds through 2007-2008 sent investors running for the door. The best example of this is enhanced money market funds, primarily bought in France, where 31.6 billion euros of sales in 2005-2006 were followed by redemptions of 39 billion in 2007-2008 and essentially no activity since.
A new song has emerged in the European funds industry, born in the midst of the financial crisis. It is called “let’s all do a Carmignac”. It may not be quite as catchy as the Conga, and maybe not quite as much fun, but it has certainly gained a number of followers.
The fund performance and distribution strategy at Paris-based Carmignac warrant more column inches than are available here. But more broadly, it is well worth looking at some of the numbers that have led others to dance to its historically-unfashionable tune of mixed asset, balanced investing, as well as examining wider industry activity to see what insights can be gleaned.
News and views on the fund industry from Reuters and elsewhere:
Indian father, son face lawsuit in U.S. over hedge funds – Economic Times
Hedge fund firms are finding themselves back in demand with mainstream asset managers despite a mixed record during the downturn. Threadneedle recently reiterated its interest in acquiring a hedge fund firm whilst adding to its absolute return range with a US equity long/short fund. The rise in interest has also been apparent in F&C’s purchase of Thames River at the end of April and Aberdeen’s recent buy of RBS’s non-core assets which gave the fund manager access to alternative products.
Threadneedle has been on the prowl for something in the absolute return space since last summer, but Campbell Fleming, head of distribution, said the hedge funds business remains “a work in progress”. “We continue to look at a lot of opportunities but not many suitable businesses have presented themselves,” he told Reuters.
Despite this year’s rally, opportunities remain in the listed hedge funds sector, according to analysts at Numis Securities.
A year ago the future of the sector looked in doubt, the broker writes in a note out today, as discounts to net asset value reached 40 percent and investors scrambled for liquidity in the wake of the collapse of Lehman Brothers.
High frequency trading strategies have been in the news for all sorts of reasons recently, attracting controversy over their effect on markets, whether some other investors may be disadvantaged, or for the level of fees piled up as the trades tick through in their thousands.
However, Ian Wace, co-founder of Marshall Wace — one of Europe’s biggest hedge fund firms with assets estimated by EuroHedge at $6.5 billion at the end of last year — has leaped to the industry’s defence, citing performance from the firm’s own Eureka fund.
Hedge fund stories from the past 24 hours from Reuters and elsewhere:
Hedge funds slash costs to win back investors – Daily Mail
John Paulson tops list of most admired hedge fund managers – Absolute Return
Hedge funds threatened by redemption requests – Hedge Funds Review
Hedge fund assets seen rebounding – Reuters
GLG Partners has confirmed positive client money flows are back on the agenda, reporting net sales of $2.2 billion in the second quarter in a trading statement which sparked a rise in the share price. The company also reckons strong performance among its funds has set the scene for more to come.
Barclays Capital last month predicted net inflows could reach as much as $50 billion in 2009, and GLG shows the numbers are starting to come through to support that theory. Of about 300 investors, BarCap found that some 80 percent were expecting to move back out of cash and into hedge funds this year.
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.