Held as the US tried to sleep after ‘Meltdown Monday’ last month, September 16th’s Conexus Financial Absolute Returns Conference featured both withering attacks on hedge funds, and passionate defences of the asset class most often blamed for any financial crisis.
The chief executive of US asset consultancy Rogerscasey, Tim Barron, provoked the audience at the conference (which was endorsed by the Alternative Investment Managers Association of Australia) with the title of his presentation alone – ‘The Ten Things I Hate About Hedge Funds’.
Barron said that even when hedge funds perform, the cost of that performance is far higher than for other major asset classes, and he also accused hedge funds of “faking low volatility…when you’ve got a kitchen sink portfolio which isn’t valued very often, low volatility is simply a product of the way the hedge fund has been built.”
However hedge fund luminary Damien Hatfield, of Hatfield Liptak Advisors, said Australia’s hedge fund industry, which grew from $6 billion under management in 2000 to $87.5 billion under management today, had delivered for the institutional investors which in 2007 spoke for 35 per cent of their inflows. Hatfield said hedge fund-of-funds had consistently fulfilled their promise to beat cash by 3-400 bps at sub-6 per cent volatility, and despite falls in hedge fund returns this year had been instrumental as relative preservers of capital. “I’ve never seen a pitch book where hedge fund managers actually say they can make money on the downside, it’s always been about preserving capital,” Hatfield said.
It was not enough for a super fund to diversify their hedge fund investments by strategy, Mark Everitt, the director of risk management at BlackRock Alternative Advisors, pointing out that the models used by statistical arbitrage managers had lead them into similar positions.
The head of independent fund-of-funds manager Aurum, Kevin Gundle, told the conference that risk management was more “art” than the science it’s often made out to be, and that it was important to emphasise idiosyncratic risk, without over-reliance on backward-looking models, for successful selection of underlying hedge fund managers.
Gundle emphasised the importance of operations and controls, and looked for the chief investment officer of a hedge fund to be directly involved in these, rather than delegating such functions to more junior backoffice staff. Gundle also liked to hear about managers’ bad calls and what they had learned from them (“there is nothing more suspicious than a perfect track record”) and wanted to know who a hedge fund’s other clients were before investing, so he could be sure that their aims and interests were aligned.