Funds-of-hedge funds have been accused of breaching client trust and bringing into question the integrity of their entire business model.
In an interview with FT Mandate, Nigel Blanshard, principal of fund-of-hedge funds firm, Culross Global Management, launched a scathing attack on his peers, blaming them for bad management and poor judgment, which had left the industry’s reputation in tatters.
He said many funds-of-hedge funds were guilty of liquidity mismatching, mismanagement of their currency hedging operations and “acute” performance failure.
Liquidity mismatching, he contended, had been prompted by asset-gathering motives.
“These funds-of-funds took the view that the larger they became, the more advantageous the pool of assets would be to provide liquidity, which turned out to be sheer nonsense.”
The second problem, he said, was that in 2008 funds-of-hedge funds “grossly mismanaged” their currency hedging by failing to look forward and anticipate the impact on the cost of their FX hedging of a rise in the value of the dollar against the euro and sterling.
Third, Mr Blanshard maintained that poor manager selection and portfolio construction work contributed in some cases to “acute” performance failure.
“I think in that respect they failed to live up to the guidance they had given to their clients about the fund-of-hedge fund being an absolute return strategy.”
He contended that the “propaganda” about manager selection and monitoring put out by many funds-of-hedge funds “does not square with reality”.
For instance, he said meeting managers face-to-face is regarded as central to the manager selection process.
“There is not a person on the planet who would hire a nanny to look after their children, without first meeting the candidate in question. Yet there are on record some very big funds of hedge funds which revealed they had not met all of their managers face-to-face. One very big European fund-of-hedge funds said one of the changes in process that they are going to implement is to meet the manager. This is a truly shattering statement that left us speechless.”
While many funds-of-hedge funds are seeking to resurrect themselves by embracing managed accounts or Ucits vehicles, Mr Blanshard contended that a significant number of his peers have business models that are broken beyond repair. He said it would be best for them to simply shut down operations and hand the money back to investors.
“Obviously it won’t happen that cleanly, which is frustrating and will make the landscape treacherous for investors because fund-of-funds managers will still be in business claiming they are reformed and that they have a new way of operating that probably won’t be much better than the old.”
Read the full interview with Nigel Blanshard in the cover story
