Hedge fund industry must change or risk losing business
Hedge funds are facing structural headwinds, and if managers don’t up the ante and change their approach to investing, they may lose business, according to a new research paper by Willis Towers Watson.
The research paper suggested that the competitive advantage delivered by hedge funds is being eroded by structural constraints, particularly the industry’s focus on “enterprise risk” rather than investment risk.
And, despite the sustained equity bull market and muted volatility in recent years contributing to lower alpha, data suggested that hedge funds aren’t assuming enough risk to deliver attractive performance in any environment.
“Simply assuming that the macroeconomic situation will improve and boost returns is a strategy of hope, and we’re urging investors to adopt a new approach to ensure they’re selecting the right manager, mandate and fee structure for their hedge fund portfolios,” said Sean Hollins, investment consultant and Australian hedge fund researcher.
To change their approach, the paper said that given managers were rarely best-in-class across multiple disciplines, fund selectors should avoid over-diversified funds, and instead identify managers that possess a unique and competitive advantage in a precise area and isolate this skill.
“This might involve carving out the best elements from flagship/multi-strategy vehicles, free from the lower-conviction ‘risk management padding’ that can suppress returns,” said the firm.
They also said investors should collaborate with hedge fund managers and shift their focus from that enterprise risk back to investment risk.
“If these managers don’t adjust their approach there will be little if any business for them here,” said Collins.
AUTHOR
Anastasia Santoreneos
Recommended for you
JP Morgan Asset Management has appointed an ETF specialist from Vanguard as it seeks to expand its ETF range.
The alternative asset manager has expanded its Singapore office with a head of Asian distribution, representing a “critical step” for the Asian business, where it is seeking to launch new offerings.
Six Australasian sustainable funds closed in the last quarter, according to Morningstar, while 39 per cent of all strategies saw outflows during the period.
The bank and financial services firm has appointed its next CEO for Australia and New Zealand, while its previous chief for the region takes up a new position.
