Hedge fund managers tell David Walker pension funds could face stronger competition when investing in their products
Richard Watkins, founder of independent capital raiser Liability Solutions, said managers are broadening shareholder registers partly to “protect themselves against a replay of the fourth quarter of 2008 and first quarter 2009, which was cataclysmic.”
Practitioners say there is no ideal combination of investors, though DWS Investments’ Udo Rosendahl said a tilt towards those with longer investment horizons helps. Overall, investors say having a mixture of a wide range of investors will aid fund stability.
Whereas managers once just raised assets, “now there is more emphasis on the stability of assets raised, how concentrated they are and what types of investors we have,” said head of business development at RWC Partners, Daniel Mannix.
‘Guided’ money
Meanwhile, some hedge fund managers want to avoid a concentration of assets advised on by the same consultant. Managers do not want to take too much ‘guided’ money, where one central figure can determine actions of many investors simultaneously, or act on their behalf.
Liability Solutions’ Watkins said: “Pension funds are often guided by consultants, which some hedge funds love because the consultant ‘does all the work for them’. But it can be a matter of ‘easy in, easy out’. Overall, it is absolutely unpredictable who will come in and go out, and at what phases.”
Don Steinbrugge, managing partner of consulting and third party marketing firm Agecroft Partners, said: “The risk you have with pension fund investors is that a large percent investing directly do not make independent decisions, but rely on their consultant to tell them which funds to hire, or fire.
“When looking at the investor concentration risk of a hedge fund, it is important to understand what percent of its investor base is associated with an individual consultant. If they change a rating on a manager, you could see all of their clients redeem simultaneously. Over time, this will change as pension funds increase their knowledge of the hedge fund industry.”
Credit Suisse’s Senior said he believes it is unrealistic for a manager to say ‘I just want pension funds, in order to have the most stable capital base’. On average pensions do have a slightly longer holding period, but there is a broad distribution of holding periods among them.
“To oversimplify greatly, a ‘good’ fund of hedge funds is likely to be a stickier investor than a ‘poor’ pension investor, for example. A less sophisticated pension – or maybe one having invested in hedge funds with only partial board support – may actually be relatively less sticky, and if they see a series of bad headlines about hedge funds they may feel pressure to redeem.”
