Tony Griffiths

28/09/2011 Author: Tony Griffiths

Size matters, especially for funds at capacity

At a time when many hedge fund managers are working overtime for every performance point possible, any obstacle is an unwelcome one – size included.

Recent reports suggest that Brevan Howard, Europe’s market leader, is to give back around $2bn from its $26.9bn master fund in order to return the firm to a size manageable enough to maintain performance expectations.  Asset gains of around 11% through August created this most pleasant of dilemmas.   

Larger managers can of course afford to do this. For smaller managers, the temptation to push capacity to its limits at a time when the going is unexpectedly good will be tough to resist.

“What a lot of managers do to avoid getting tied down is say something like, ‘capacity is currently $500m but it depends on the market conditions when we get there’,” says Phillip Chapple, executive director at offshore fund consulting firm KB Associates. “It also depends on the strategy. If it is a niche strategy then it can be particularly difficult to maintain performance beyond capacity.”   

Illiquid strategies will have little room for manoeuvre. Larger funds, though able to survive on a management fee, won’t necessarily need the boost. So who gets their money back?    

Returning a percentage to everyone is the reasonable course of action, notes Chapple, but often it’s not as simple as that. “Sometimes it will be on a relationship basis,” he adds. “There will be some investors, who perhaps have their own investment mandate restrictions, where returning assets may force them to redeem altogether. Here you need to tread with caution.

“A percentage is the fairest way, but you need to be wary of political considerations.”

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