Hedge fund managers are meeting a much more sceptical investing public after the September 2008 bankruptcy of Lehman Brothers. In 2008 the average hedge fund fell in value by 19 per cent, according to Hedge Fund Research. “2008 was a turning point in so many ways,” Kevin Gundle, CEO of hedge fund-of-funds manager Aurum told ‘The New Alternatives’ conference, which was held by Investment Magazine publisher Conexus Financial, in Melbourne last month. “There were breaches in trust.” This year hedge fund performance has also been poor. Some long-short equity funds have dropped by as much as 15 per cent.
Even billionaire hedge fund manager John Paulson, who made a fortune betting against the U.S. housing bubble, has seen his flagship fund, Advantage Plus, fall more than 30 per cent this year. “The macro-economic environment is between purgatory and catastrophe,” says Gundle. “It’s not a risk friendly environment.” This has made hedge fund investors wary. “We were disappointed in hedge fund-of-funds,” says Hugo Agudo, portfolio manager at IOOF. “We’ve decided to move forward on our own.” Agudo says IOOF is in the process of picking a multi-strategy hedge fund and providing seed capital to incubate talented managers. He says managers who invest alongside clients establish an alignment of interest.
“If a manager has 60 to 70 per cent of their wealth in the funds they manage then they’re going to work harder,” says Agudo. IOOF does not begrudge a successful manager their fees. “We prefer 2:20 if they get the right return,” says Agudo, referring to the 2 per cent fee charged by hedge funds based on assets under management and a 20 per cent share of any profits. Andrew Kobel, portfolio manager of external debt and absolute return mandates at Victorian Funds Management Corporation (VFMC), shares Agudo’s views on fees and profits. “We focus very much on alpha,” says Korbel. “We try very much to get the appropriate hurdles in place and try and look closely at claw-backs, reserve arrangements, liquidity and lock-ups.” VFMC manages $6 billion in alternative and fixed income funds and prefers a fund-of-funds investment model with hedge funds. It has hired Aksia to perform due diligence on hedge funds.