GAIM USA: “Golden age of alpha” is over for hedge funds
“The golden age of alpha” is at an end while industry experts expressed alarm at the dearth of investors allocating into smaller hedge funds.
Hedge fund figureheads warned that the industry is unlikely to regain its legendary money-making status anytime soon. “There are approximately 8,000 hedge funds and alpha at the average hedge fund will be less going forward. Between the 1980s and 2007, we had a golden age of alpha but the industry is now a crowded field and I do not expect a return to the 1980s,” said William Michaelcheck, chairman and chief investment officer at Mariner Investment Group, speaking at GAIM USA in Boca Raton, Florida.
This comes as the industry delivered negative returns in two out of the last four years whereas 2012’s gains of 6.22% did not excite. The situation has also not been helped by the growing regulation of the industry, which some panellists complained was proving a distraction to managing money.
“Take Form PF, for example,” said Tim Garry, portfolio manager and chief risk officer at Passport Capital, a San Francisco-based hedge fund running $3.7 billion in AuM. “Reporting all of this data to regulators on a quarterly basis takes our team a lot of time,” he complained. Other rules likely to add to hedge fund costs include FATCA, AIFMD, mandatory clearing of derivatives and CFTC registration.
These regulatory and growing operational demands, as well as mounting pressure on fees from institutional investors have resulted in huge costs for managers. In fact, a Citi Prime Finance survey revealed hedge fund managers needed to run between $250 million and $375 million AuM to enable their management fee to adequately cover the costs of support personnel and third party expenses.
All of these expenditures disproportionately impact smaller hedge funds. Many smaller funds, according to some panellists are struggling to attract capital, particularly from conservative-minded investors reluctant to take on the added risk. This confirms a Citi Prime Finance survey in 2011 which acknowledged one manager in eight controlled the majority of the industry’s $2 trillion in assets.
This is despite research from PerTrac, which revealed smaller managers (<$100m AuM) have outperformed mid-sized and larger (>$500m AuM) hedge funds every year since 1996 bar 2008, 2009 and 2011. Since 1996, the cumulative return for the average small manager stood at 558% while mid-sized and larger firms delivered 356% and 307% respectively, according to PerTrac. Many cite the ability of smaller managers to be nimble and access niche markets as being key to this outperformance.
One panellist said the inability of smaller managers to attract meaningful capital was a profound threat to the future of the industry. “Small managers are important as they are the future of the industry. If investors do not support smaller managers, then the industry will be in trouble going forward,” said Jane Amanda Halsey, founder and president of Roundtable Forum, an independent capital introductions service.