According to TABB Group’s latest report, smaller hedge funds should be leaping for joy as investors redirect themselves, having been rejected by large funds. Some 20% of participants in the financial market analyst’s 2005 survey said they were no longer accepting new capital, and more than half of large funds have narrowed their targets to a very specific set of investors.
“This creates an opportunity for smaller funds to attract the investors that do not have access to the well-known and well-funded money managers, but want to allocate some of their money to hedge fund strategies,” says the report.
But small funds shouldn’t get carried away just yet. As the number of entrants to the market increases, so too does the number of funds liquidated – and we’re not talking about liquidations resulting from poor performance or fraud.
Not a day passes without forecasts of growing asset allocations to hedge funds. At the same time, though, some small funds are realizing that they just cannot attract enough capital to maintain viable businesses. Promises of capital preservation, risk-adjusted returns, and low volatility mean little these days, it seems. Only 6% of funds surveyed by TABB use capital preservation as a value proposition. Some 7% spoke of risk-adjusted returns, and 15% of low volatility.
UK fund manager Progressive Asset Management discovered that returns and low volatility are not the things that attract investors. It was forced to liquidate its UK long/short small/midcap hedge fund after just 18 months purely because of lack of interest, despite boasting low volatility and returns of 19%. A lack of money raised at launch and rallying equity markets can’t have helped but the main reasons for the paucity of interest seem to be as simple as the fund’s lack of a long/short track record, and the fact that it featured no famous personalities among its managers.
A whopping 42% of TABB’s survey respondents use their track record as the main value proposition, which goes to show that investors have paid no heed to research that proves that track records count for little since returns invariably fall off after the first 18 months that a fund has been running. The second most popular value proposition is reputation/people.
Just when you think the investor market is showing its maturity by looking for risk-adjusted returns, and considering more complex means of investing, the harsh reality kicks in. Investors on the whole will just wait and eventually follow the herd. As one manager puts it: “It’s as simple as this. Get two fund managers who are ex-Tudor, tell investors you’re having a soft circle close, and watch yourself move to the top of the investors’ wish list.”
