According to Nicola Romito, chief executive officer of Milan and Dublin-based Monte Paschi Asset Management, European investment houses made the mistake of promoting relative return products as total return strategies. As a result, he contends that investors who took a tumble when the markets fell are now reluctant to buy into mutual funds, preferring to put their money into total return products instead.
Interestingly, he claims that while mutual fund products are more transparent and better managed, such virtues are deemed to be weaknesses by investors who also favour total return products precisely because the investment strategy and cost structure are more opaque.
Mr Romito says the asset management industry is to blame for not properly informing investors that they were buying relative performance products. “All they know is that in the last four years they’ve lost money,” he laments.
Although the predicament is one faced mainly by retail fund managers, the issue of investor education it highlights resonates across the institutional arena, particularly in relation to hedge fund investment.
Increasing institutional interest in absolute return strategies has led to calls for more education and regulation so that investors can make better-informed decisions while enjoying some measure of protection.
Regardless of their size or level of sophistication, investors tend to follow the herd in search of the next best bet. They followed the proverbial piper towards the imagined Holy Grail of technology stocks and got burned. Now they risk wasting money on what could turn out to be ill-chosen alternative assets. At a time when hedge fund performance is not so remarkable and the bulk of institutional money is chasing a few successful strategies causing opportunities for return to be arbitraged away, it is critical that investors are fully informed about the potential rewards and pitfalls.
There is little point in relying on hedge fund promoters to do the right thing by investors. They naturally want to maximise asset growth and fee income and if investors feel compelled to follow one another into the same strategies, why stop them?
The over-riding business focus of hedge funds is evidenced by their general antipathy towards tighter regulation, for example, the investment advisor registration requirement of the US Securities and Exchange Commission.
So who should be protecting the interests of the institutional investor? Perhaps the consultant community could be doing more. In fairness, they were slow to warm to hedge funds, not least because they lacked the resources internally to thoroughly check out the hedge fund universe.
But now that many consultants are guiding investors towards funds of hedge funds, it is incumbent on them to perform sufficient due diligence on product providers to determine which underlying strategies are seeing the greatest asset inflows and which are generating the best returns. Investors need to be reminded that biggest is not necessarily the best.
The drift to specialistion
Will a single business model emerge in the global asset management industry?
While representatives of large multi-asset firms claim they can satisfy all-comers and specialist investment houses contend that no single organisation can be good at everything, the consensus view is that the industry can happily accommodate both approaches.
Certainly, the amount of investment outsourcing taking place would seem to ensure the survival and profitability of the niche operator.
Julian Tregoning, a director of Mellon Europe, who is due to chair a debate on this very question at Fund Forum 2005 in Monaco in July, maintains that most large investment managers will always need to outsource many of their asset classes. Hence there are always going to be specialist players by asset class, who also might manage sizeable sums in that asset class.
Perhaps a more interesting question is whether the long-only and hedge fund industries will ever converge. Robert Parker, vice-chairman of Credit Suisse Asset Management, says some of the more successful hedge funds are setting up long-only products, while some of the more successful long-only managers are setting up single hedge funds or funds of hedge funds.
Increasingly, he adds, institutional investor demand is evolving towards hybrid products which, for example, comprise 60 per cent long only and 40 per cent long-short. In three to five years, he expects the asset management industry to be dominated by successful ex-hedge funds and ex-long-only manager with such fused products.
Henry Smith, editor,
henry.smith@ft.com
