Institutionalisation makes hedge fund managers grow up
Institutionalisation of the hedge fund industry was the key talking point in a panel discussion chaired by Dan Shapiro (pictured), partner of Schulte Roth & Zabel International. The panel included Jane Buchan, CEO of FoHF firm PAAMCO, Peter Schoenfeld, chairman and CEO of PSAM, Bernard Oppetit, chairman of Centaurus Capital, and Nicholas Botta, CFO of activist fund Pershing Square Capital Management.
Currently, about 60 per cent of the industry’s USD2trillion AUM is now institutional money, with Shapiro noting that in a recent discussion he was told that 90 per cent of new money allocating to hedge funds is institutional in nature.
Shapiro’s first question to the panel was what institutionalisation meant to their business.
Schoenfeld said that the experience of working at Schroders before setting up PSAM in 1997 meant that dealing with regulators was nothing new and that most of their investors “were already institutional in nature”. “Clearly institutionalisation of the industry is steam-rolling. We’ve got the likes of Form PF to file quarterly, which is basically stress testing our portfolios. The pendulum has shifted towards regulation right now and that’s putting pressure on us,” said Schoenfeld.
Oppetit said that Centaurus had always had an institutional framework. He said that the golden age of investors queuing up to allocate money was gone. “The nature of the dialogue is changing, investors are much more demanding. We’re doing managed accounts for sizeable tickets but it’s obviously labour intensive,” said Oppetit.
Large institutions like PAAMCO are using separate accounts as opposed to commingled funds which according to Buchan “is helping to improve returns” and she sees this as a continuing institutional trend going forward. She added a second observation: the early adopters of hedge funds are being replaced by big institutions. “The dad is being dragged in to the store by his teenager to buy the iPad. Institutions like pension funds are reluctantly being forced to invest in hedge funds to achieve their annual return targets of 7 to 9 per cent,” said Buchan.
“I think institutionalisation has been positive. It’s helped get us ready to handle regulation, improve how we communicate internally and with our investors. I want to recognise a weakness in our systems before a smart investor does so it’s made us raise our game. We’ve grown up,” added Botta.
On dealing with the difficulties of increased due diligence, Buchan said that one of the main challenges was “information overload” and that pulling out what is mission critical to investors is far from easy. Botta said that Pershing wanted to be as helpful as possible to investors because a “better informed investor is a better long-term investor”, particularly during down periods which all funds suffer at some stage.
Schoenfeld admitted that investors wanting to meet portfolio managers, go through trade examples, etc, was a drain on resources but emphasised: “It makes senior people aware of the fact that this is a serious business, not a game.”
Slicing and dicing data in different ways for different investors was a challenge in Oppetit’s view, who said that giving investors the raw data was “sometimes easier”.
All the panellists confirmed that they had raised their level of transparency, with the likes of PSAM happy to discuss key positions, where possible, with investors each month. Transparency is quite natural for an activist fund like Pershing as most of the portfolio’s 12 positions, by their very nature, are already known to the market said Botta.
On the issue of fees and how managers are adapting to investor requests, Schoenfeld said that on either side of the 2/20 fee structure it’s more a “result of performance than anything else”. “The pressure is going to increase on fees. We have created different classes for longer lock-ups,” confirmed Schoenfeld.
“The one size fits all approach is no longer relevant. We make special arrangements with certain investors. You don’t discuss fees when you visit a brain surgeon. Managers make mistakes and investors understand that,” said Oppetit.
Concluded Botta: “We’re 1.5/20 so we’re already lower than our competitors and under less pressure from investors.”
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