However, BNY reported that asset managers are now fighting to win brand recognition among institutional investors, whose traditional focus has been people and investment process.
While performance is considered critical to survival and success, asset managers are clearly concerned that the generation of alpha alone is an insufficient distinguishing factor as the industry becomes increasingly populated and fragmented.
Daron Pearce, managing director, client management at BNY remarks that brand awareness is also becoming a factor in the hiring decisions of the investors themselves.
If this is so, it could be that large asset management houses which have refashioned themselves as investment ‘boutiques’ will have the edge over stand-alone specialist managers. Institutional investors are more likely to be familiar with names such as Credit Suisse, Merrill Lynch and Axa than most of the plethora of small players who have come on the scene in recent years. However, there is also a strong chance that those few boutique operations which are offshoots of household name companies such as Old Mutual will benefit from established brand awareness.
The issue of brand brings a whole new perspective to the old question of whether size matters in the investment business. Time will tell.
Cutting hedge fund comments
“There are a huge number of hedge fund conferences planned all over Europe for the next year, but who knows who is going to attend them?” So comments Greenwich Associates analyst Berndt Perl on declining interest in hedge fund investment in Europe. Recent Greenwich research found that the proportion of European institutions planning to start using hedge funds has dropped from 19 per cent in 2004 to 8 per cent this year, while the proportion expecting to hire a hedge fund manager has fallen from 23 per cent to 8 per cent. The decline is blamed on poor hedge fund performance, a factor which has particularly affected funds of hedge funds.
In this issue we report on the plight of funds of hedge funds, which face pressure on three fronts - high fees, poor performance and falling subscriptions. It is suggested that as conventional markets are now performing better, institutions might be turning away from alternative assets. Also, as investors become more informed about hedge funds, they are perhaps more likely to buy single strategy funds.
Certainly, some asset managers would appear to be agreement with the latter view.
Baring Asset Management launched its third long/short equity hedge fund last month – the Baring EMEA Absolute Return Fund – while F&C Alternative Investments rolled out a new European long/short equity strategy - the F&C Citrine Fund. Another optimistic gesture in the direction of these alternative investments saw State Street Global Advisors expand its hedge fund strategies team to develop new derivative-based, volatility and correlation arbitrage strategies.
A glance at the latest hedge fund performance report compiled by Edhec suggests that picking and choosing your single strategies might be the best way to reap decent returns. Long/short equity funds have performed well over the last three and a half years, while the annual average returns of CTA Global strategies over the same period have been remarkable.
However, despite the potential for building a higher performing portfolio, it is probable that first-time investors in hedge funds will continue to choose the fund of funds route because it is the expedient and less demanding, if more expensive, option. Then again, if poor fund of hedge fund performance persists and management costs remain high, the flows into these structures might slow to a very worrying trickle, so precipitating a rush to downwardly revise fee regimes.
That said, hedge funds still wield a seductive power over asset managers. According to a poll by Morningstar, 17 per cent of fund groups (compared with 10 per cent last year) said that managers were leaving their organisations in order to run hedge funds.
Evidently, the promise of high performance fees yet proves irresistible and outweighs any doubts the managers might entertain about their ability to reach the necessary watermark.
One shouldn’t be surprised. Fund managers are a bright and optimistic lot who are well capable of elucidating the complex spectrum of hedge fund strategies to potential investors. Let’s hope they don’t end up delivering their message in desolate arenas peopled only by forlorn financial journalists!
(See Alternative Assets special report pages 40-43)
Henry Smith, editor
henry.smith@FT.com
