Funds Hub

UK universities eye and keep an eye on new hedge fund punts

Pension schemes are moving away from the usual equity/bond/real estate mix to put their eggs in as many baskets as possible. No wonder then that the USS — the 31.6 billion pounds UK universities pension fund — is putting an extra 1.5 percent of its assets, or about 474 million pounds, into hedge funds, as its CIO Roger Gray tells Reuters.

If you are rushing to the phone to pitch business with Mr Gray, however, STOP a minute fund manager: be prepared, the USS is not only eyeing alpha, it is going to ask a few questions about how alpha is distributed and how investors are protected.

“Is the board of the hedge fund constituted in a way which gives us assurance that they are actually acting in the interest of the limited partners rather than in the pocket of the managers?” he said.

Key words for this pitch: governance, transparency, best and practice.  

Key advice for this pitch:  forewarned is forearmed.  (The USS does not seem to need the usual ’caveat emptor’ advice).

Go forth, brave hedgie!

Where pension funds went wrong

Knut Kjaer, adviser to some of the world’s biggest asset pools, and former head of Norway’s government pension fund, told pension funds some home truths at the CFA Institute’s European Investment Conference on Tuesday.

Kjaer said the financial crisis had exposed two main pitfalls in institutional investment – the tendency to run with the herd, and the adoption of overly complex portfolios.

He was especially critical of investors who had made an allocation to hedge funds or private equity as a form of diversification without properly thinking through the implications for overall risk levels. He pointed out that some so-called diversified portfolios had performed very badly during the financial crisis.

So what is a poor pension trustee to do? Kjaer said they needed to construct portfolios that differentiated better between alpha and what is just costly beta: “Particularly in alternative assets you see a lot of beta dressed up as alpha.”

He also suggested pension funds should think about reducing the overall risk they are taking. Pension funds tend to set the risk level too high in good times, blame the asset manager when things go wrong, and then downscale the risk at the worst possible time.

Kjaer believes pension funds need a more disciplined risk framework with decision rules that enforce regular rebalancing to top-slice frothy assets and buy undervalued assets.

“This prevents the assets with the highest drift from dominating the portfolio and gives you an automatic value bias,” said Kjaer. “It also prevents you entering markets where the upside is small in comparison to the downside.”

Morning line-up: Terminator, takeovers, Ucits

News and views on the hedge fund sector from Reuters and elsewhere:

Morning line-up

Hedge fund stories from the past 24 hours from Reuters and elsewhere:

Hedge fund investor goal: An exit plan -WSJ

Hedge fund compensation; New funds, new tricks – Seeking Alpha

Hedge funds gain in August – Reuters

Alpha advertising - FT Alphaville

From the ashes: Can listed hedge funds rise again? – CityWire

GLG pulls in punters

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 argument goes that investors burned by 2008 will get greedy again, and aggressively seek out the quickest route they can see to recoup the losses. If that theory proves true then perhaps investors were not as spooked as some have thought by the imposition of gates to redemptions when the crisis was at its height.

Longer term, it will be interesting to see if flows can recover enough to send total assets back to pre-crisis levels, because the revived love affair with hedgies is hugely vulnerable to fresh market wobbles, and is not universal. Trustees of the $40 billion Massachusetts’ state pension fund on Wednesday voted to scrap its portable alpha strategy and slash absolute return fund allocations by a quarter.

Getting better all the time

Hedge fund firms are once again positioning their businesses for better times ahead — lending further weight to anecdotal evidence that investors are turning back to the industry.

Today brings news that Lansdowne Partners has stopped taking money into its flagship $8 billion UK Equities fund, having recently accepted new cash following $1.2 billion of investor redemptions.

Meanwhile, Polygon Investment Partners — in the process of winding up its multi-strategy fund ($2.5-$3 billion at the end of ’08) — is launching two new funds specializing in European equities and convertible bonds.

And activist Centaurus Capital is returning to event-driven investing with a new fund, despite last year’s disappointment when performance tailed off and its Alpha fund was wound down after investors rejected a restructuring plan.

Last year may have been a chastening time for most hedge funds and investors may have pulled out a net $300 billion between October and June, but the pace of outflows seems to be slowing and some commentators think the last month or two could actually have seen net inflows into the industry.

We’re far from another boom but the prospect of better times ahead doesn’t seem quite so distant any more.

Watch BlackRock’s Mark Lyttleton give his market view

Mark Lyttleton, manager of the 1.5 billion pound BlackRock UK Absolute Alpha fund, gives his view on the recent rebound in the equity market and his outlook for the rest of the year and beyond.

from Global Investing:

Just another Snark hunt?

The Lewis Carroll poem The Hunting of the Snark (An Agony in 8 Fits), follows the misadventures of a group of seafarers, amongst them a banker and a broker, as they search for the elusive mythical beast. We are warned at the outset that catching Snarks is all well and good, but beware if your Snark is a Boojum, because - well, we'll come to that.

Alpha looks set to become as equally elusive in the next 20 to 30 years as investors switch to passive investing and exchange-traded funds (ETFs) in greater numbers, and the amount of information available to all market participants increases.

Suzanne Duncan, financial markets industry leader at the IBM Institute for Business Value, argued at the Fund Forum in Monaco this week that some 85 to 90 percent of investment returns in the next 20 to 30 years will be beta returns, as investors become increasingly disillusioned with paying for actively managed funds that fail to deliver.

"Only 15 percent of long-only active managers have outperformed their stated benchmark over the past 5, 10, 15, 20, 25, 30 or even 40 years," she says. Yet some 70 percent of the world's assets under management is currently invested in traditional long-only active strategies.

Duncan believes alpha will become increasingly hard to find as transparency - that is, nearly instantaneous and accurate information - increases. "Some academics are sceptical that there is such a thing as alpha anyway," she says.

Mark Tennant, senior adviser to JP Morgan Securities Services, points out that it is no longer as simple to add alpha in developed markets as it was in the 1970s, because more market participants have access to the key information at the same time.

"Asset managers need to recognise where they can add value and where they can't," he says. "For example, I don't think simple long-only equity products can add value any more, unlike in the 1970s say, when there was less information available to all."