Investors should look beyond the largest hedge fund managers for diversification and lower fees, according to BlackRock Alternative Advisors.
In a presentation to investors in Sydney and Melbourne, Mark Woolley, managing director at BlackRock Alternative Advisors, said fees as low as 1.2 per cent in annual management charges and 12 per cent of returns were being paid to smaller managers unlike the 2 and 20 model of more established players.
BlackRock’s advisory business manages $19 billion, enters into co-investments and monitors managers in Europe and Asia and research cited by Woolley showed six per cent of all hedge fund managers run 68 per cent of the US$3 trillion invested in hedge fund strategies worldwide – often the most expensive managers.
He questioned whether investors were getting the full diversification through such managers and recommended taking more idiosyncratic stock risks with other under-researched managers.
Broadly, the hedge fund strategies he currently favoured for investors were around filling liquidity gaps from the increasing regulatory constraints imposed on banks and in the energy, healthcare and TMT (technology, media and telecommunications) sectors. He saw also the reduction of bank lending leading to volatility in emerging markets which could be taken advantage of.
The overall professionalism of a manager was another factor Woolley looked for in choosing managers.
“The best hedge funds in the world are not just the best stock pickers, they have the best controls, the best staff retention,” he said, citing what he termed the cockroach theory: if one piece of governance was awry at a manager, it was likely a sign that there many other factors wrong too.
Mark Woolley was speaking in Australia at the invitation of the Investment Management Consultants Association.
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