Why CFOs should stop mistrusting hedge funds
Although hedge funds are in an advantageous position in offering financing, they can only keep doing so if their end investors are willing to put money into the strategies. In a survey of hedge fund investors by Euromoney, the majority said they were positive on financing strategies, and that their returns had been consistent. They pointed out, though, that there are certain requirements that managers need to fulfil. One end investor says: “We’ve seen funds that do a good job of providing finance, and it has the potential to offer a great source of uncorrelated alpha if done right. The quality of the firm is critical, however, as is their experience, as only those that have been doing it a long time really have the relationships needed to source deals.”
And the type of financing a hedge fund manager offers will greatly affect risk/return profiles. Jabir Sardharwalla, CIO of fund of hedge funds Psolve Alternative Investments, says: “If you want low volatility you need a strategy that is straight financing and does not look for an equity-type upside. Where there would be more volatility would be where a manager is lending to a biotech company to fund research for a cure, and has a warrant or convertible structure built in so that when the firm is successful, the manager will benefit from the upside.”
Charles Gradante, managing principal of hedge fund consultant Hennessee Group, says that while there is more money flowing into this area, there are still only a few managers able to offer financing as a core strategy. More often it is embedded in a broader strategy and returns from financing have therefore tended to be difficult to track. Unsurprisingly index providers are struggling to know how to categorize financing strategies.
Sardharwalla adds that investing in finance strategies can be difficult as part of an overall asset allocation process because they are often hard to pigeonhole. “We are careful to find funds where financing is the core,” he says. “For example, if you’re looking at a real estate hedge fund, we wouldn’t class them as a financing strategy if they are acquirers of land, and lending to developers is only part of what they do.”
