Progress report
An assessment of hedge fund YTD performance in the face of renewed fears for a potential eurozone crash Read More
24/08/2011
Comment: Steven Simmons
As the dust continues to settle from the fall-out of the recent US downgrading by Standard & Poors, the pundits have begun the guessing game as to which ‘too big to fail’ hedge funds are actually failing. Meanwhile, the gasping sounds you hear at the other end of the spectrum are the collective last breaths being drawn at numerous emerging and mid-level hedge funds. For those lucky few funds that were able to survive 2008, 2011 may end up being the year written on their obituary.
The first reason is very simple – the inflows that had been on the rise in 2011 (roughly $75bn according to BarclayHedge and TrimTabs, reporting the heaviest first-half inflow since 2007) will not only stop, but reverse. Human nature has shown time and again that when you have calamitous market moving events like August, the natural first move for investors lacking the intestinal fortitude is to sell (if possible) and to bury the money under the mattress, and their heads in the sand.
For most hedge funds, $100m is the barest minimum required to truly create and maintain a thriving business. To the layman, this may seem like a staggering number, but once the actual costs of running the business of a hedge fund are taken into account, that $100m is chump change, and also the reason why the funds in the top 10% of AuM continue to take in 90% of the new money. It is simply too expensive to run a small fund based on the 2/20 fee structure – if they can even get that these days. Building out an institutional-calibre infrastructure – including legal fees, auditors, administrators, real estate and equipment, coupled with salaries (for those lucky few), execution costs and research – often means there is little, if any, left over for actual marketing and fund growth. The old adage of “it takes money to make money” rings true.
There is also a ‘flight to quality’ issue. In this case, I am referring to the talented employees at the underlying developing funds. While many of these folks have made the move from the larger, well-established hedge funds or household name sell-side shops, the very palpable fear of going another year with a reduced or non-existent paycheck is going to be too much to stand.
This is especially the case for the folks in the investor relations and capital development positions. Many of these talented individuals may have the greatest rolodexes and relationships with the key cheque-writers, but unfortunately they are not magicians, and their hands are tied if the fund is underperforming. Loyalty may be an admirable quality, but it does not pay the mortgage.
Being in sales, it is my nature to be an optimist, and even as dismal as the picture may be, a few glimmers of hope remain. First and foremost, for institutional investors, the inevitable shake up within the hedge fund industry is a much needed separation of the wheat from the chaff that was not completed in 2008.
There are too many mediocre-to-poor funds creating unnecessary noise and static, often overshadowing the numerous undiscovered, developing funds that are not only surviving, but are currently thriving. The essential combination of sheer talent, a nimble touch in the market and highly tested and utilised risk measures are key factors for those prescient investors looking for true diamonds in the rough.
Additionally, talent will attract talent. For many of the funds that do survive the impending carnage, there will be many talented individuals who will leave sinking ships and further bolster the ranks of those funds that are out-performing and well positioned to grow. And naturally, there will be a spate of new start-ups and emerging managers consisting of very talented teams who will (ideally) bring more to the table than their predecessors, thus regenerating the cycle of fund development and growth.
Steven Simmons is head of prime services at Maxim Group
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60 seconds with... Kenneth Turchin
CAN YOU DESCRIBE YOUR CURRENT ROLE?
I have worked in public accounting and hedge funds and in the past eight years have been selling middle- and back-office services to the alternate investment industry. My role is to build relationships with clients, teach them about SS&C’s products and services, and ensure seamless transactions every time the firm launches a new fund.
IF YOU WERE DOWN TO YOUR LAST £1,000, HOW WOULD YOU INVEST IT?
I would buy THREE shares in Apple and hope for a repeat 383% return in the next five years.
WHAT WOULD YOU DO IF YOU WERE IN PRESIDENT OBAMA’S SHOES?
That’s one pair of size 12 shoes I do not want to be in!
WHO WOULD PLAY YOU IF THEY MADE A MOVIE ABOUT YOUR FIRM?
Kevin Bacon. He is a versatile actor and the centre of the entertainment universe. I am in sales. Everyone in the industry would be linked to me in six steps or less. My client list would be ridiculous.
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