Fund selectors have had their say on issues such as attributes of managers, tail risk, liquidity challenges for hedge funds, and issues of choosing third party funds.
Why choose third-party funds, and do you prefer those from larger institutions or boutique firms?
Fabrice Kremer, senior fund analyst from Banque de Luxembourg says that to ‘build a toolbox’ is not necessarily to do with choosing the best performing funds, but selecting those that can cover a client’s needs in different market conditions.
Therefore, if a defensive fund underperforms in a bullish environment, it is not an issue. Stability of an underlying institution is important. Kremer is cautious about using boutiques as fund providers in case they face financial difficulties.
He believes that in a pressured situation smaller firms, of which the managers are often also the founding partners, they will not be focused on day to day fund management.
Larger institutions benefit from implicit government guarantees, he says.
“The inference of ‘too big to fail’ that at the end of the day the government will help you means it is easier to focus on the day to day job.”
Is the problem with hedge funds and illiquidity over?
Ben Funk, Managing director, head of research from Liongate Capital Management
says: “Before the financial crisis, private banks tried to convince fund of funds managers to offer monthly liquidity, which most multi-strategy managers should not do.”
“They raised a lot of money through structured products, for example, but when they called for their money back many of the managers could not meet the redemptions. We have not had problems meeting redemptions.
“To invest [in less liquid managers], rather than try to change the terms on your fund, perhaps the more appropriate strategy would be to raise a new vehicle explaining the strategy will have a longer duration and funds with longer lock-ups.
“We absolutely will not mismatch our portfolio duration.
“Most of the redemptions during the crisis came from the retail clients in Europe and as a consequence we have not focused on those clients as we built the asset base back.”
Are your clients showing demand for offshore hedge funds?
Markus Taubert, Head of private banking from Berenberg Bank says: “There has been a strong slowdown in demand for any of the hedge funds, especially offshore-based strategies, from our clients.”
“It has also been about us not actively recommending clients jump into the strategies, because numerous strategies have not delivered on their performance, especially downside protection that they promised to offer investors.
“Also, even semi-liquid strategies could become fully illiquid.
“It is always a hassle for a [German] client, and you have to structure a new wrapper, and it is only a few of our clients looking for these investments.
“The certificates themselves are easy to structure, but if it is only for €1m or €2m it is a lot of work structuring.
“It is then a question of profitability, and whether it is worth making such an effort for such a volume.
“We do not question the ability of hedge fund managers to deliver good returns, although the availability of leverage is clearly scarce these days, which is different to a couple of years ago when it was a lot better.”