Allocator Quarterly Q3 2016

This AQ focuses on the hedge fund industry holistically, exploring the challenges faced by both allocators and managers.

[CITE AQ – Q3 2016]

At the last count, our textbooks have no mention of how financial theory should play out under a prolonged (sub-) zero interest rate environment. For now, we can conclude it is one of the largest financial services experiments ever seen. And we thought China, opening up its currency and equity markets in a highly controlled manner was an experiment in how to develop a capital market that deserved attention.

Meanwhile, the hedge fund industry is tethering at the edge of a cliff. On the one hand it wants to be recognized as a mature asset class, yet it does not know what adult it wants to be. It reminds us of adolescence, whereby it changes its attitude on a nearly daily basis, experimenting with different outfit, colours, and tone of voice. We continue to stick to our thesis that for it to be a mature asset class it needs to recognise that investors demand more than a star-manager and huge egos.

Investors remain bewildered by industry fees, which remain high despite the more recent compression, and the value creation cycle they promise in return. We have avoided contrasting funds against passive products. This has been done by academics repeatedly. Instead, we play lotto metaphorically and remind investors to take the long view.

With performance being under ever more scrutiny, we are putting forward another thought on business models within asset management. Our key recommendation remains largely the same: corporate governance improvements will remain a key differentiator for early stage asset managers. Inviting independent directors and advisors to the business and being transparent about the business plan is likely to create a stronger relationship with a firm’s key customer base: the investors.