Hedge funds and private equity houses need to be prepared for a backlash in the wake of the credit crisis, according to Roland van den Brink, board member at Mn Services.
Speaking to pension funds and wealth managers at a recent seminar hosted by Rob van Kuijk, chief executive of Finles Capital Management, van den Brink said: “There is pressure on governments and at the EU-level for more regulation of the alternative investments industry. There is going to need to be greater transparency and pension boards will have to know what they are investing in. Returns, risk and rewards will have to be better balanced, with less complexity and more sense and simplicity, so what you see is what you get.”
Van den Brink added that politics and principles of social acceptability are inevitably going to play a more important role after the excesses of recent years. He said hedge funds would also have to justify more the added value they bring, as many are charging high fees for straightforward arbitrage strategies that were common in the 1980s.
Mn Services is an investment and fiduciary manager with EUR56bn in assets under management, largely for Dutch institutional investors. The private pensions market in the Netherlands is the second largest in Europe after the UK, with around EUR900bn in assets. On average, an estimated three to four per cent of the portfolios of Dutch medium-sized to large pension fund portfolios are allocated to hedge funds.
Mark Baak, head of portfolio management at Finles Capital Management said regulators and institutional investors should not confuse “activist” hedge funds with the entire alternative investments industry. At least 95 per cent of hedge funds have got nothing to do with an active shareholder strategy.
He added that hedge funds have outperformed government bond and equity investments in the past ten years. Hedge funds outperformed the S&P 500 index by more than six per cent per annum with only half of the volatility. The outperformance was generated by limiting, or avoiding, losses during stock market crashes.
The Finles/IEX Dutch Hedge Fund Index, composed of 27 Dutch single manager hedge funds with assets under management of about EUR1.5bn, has also outperformed the HFRX Global Hedge Funds Index this year.
Baak quoted recent Bank of New York/Casey Quirk research that indicated hedge fund assets will double in the next four years and that fund of hedge funds are expected to capture 60 per cent of net capital inflows between now and 2013.
Finles Capital Management is launching the Finles Diversifier Fund which is a fund of hedge funds designed to offer professional investors diversification to long only portfolios.
The portfolio of the new fund is intended to have a correlation with the MSCI World (equities) Index below 0.3 at all times and has a target return benchmark of six per cent per year.