There is an opinion that managers of hedge funds often run their portfolios to the detriment of thei...
There is an opinion that managers of hedge funds often run their portfolios to the detriment of their long-only vehicles. But is there any truth to this or is it just an urban myth? Jenne Mannion investigates
Long-only fund managers who also run hedge funds are often the subject of criticism if the former start to falter. The common complaint is they are neglecting the long-only portfolio in favour of the hedge fund, which offers higher revenues due to lucrative performance fee structures.
Well-known managers who run both long-only and hedge funds include Tim Russell at Cazenove Capital, Philip Gibbs at Jupiter, Roger Guy at Gartmore, Richard Pease at New Star, Philip Wolstencroft at Artemis and Martin Taylor at Thames River Capital.
While some of these managers have been subject to criticism if their long-only fund suffers a period of poor performance, Marcus Brookes, a fund of funds (Fof) manager at Gartmore, says, in most cases, this has been unfair.
"Richard Pease, the European fund manager at New Star encountered a weak period in his long-only European Growth fund, not long after the fund launched about a year and a half ago," he says.
While this may have raised some eyebrows at the time, he says, Pease's long-only fund has definitely bounced back with excellent performance. Year-to-date, the New Star European Growth fund's performance has been exceptional, reflecting the fact Pease certainly remains committed to this fund, Brookes adds.
It is also worth noting that Leon Howard-Spink, a European long-only manager at Schroders, also had a tough performance period at a similar time to that of Pease, says Brookes.
"Pease and Howard-Spink both have very similar investment styles and they both underperformed at the same time, so it was obviously the style that was not working in the current market environment rather than anything to do with Pease running the hedge fund," he says.
Cazenove UK Growth & Income manager Tim Russell is one of the industry's best known UK equity fund managers, having a long and distinguished performance history. Over the past three years, however, his performance has dipped relative to his long-term track record, marking the toughest time in his fund management career.
Over three years, Cazenove UK Growth & Income is ranked 158 of 251 funds in the UK All Companies sector on a bid to bid basis to 4 September, according to figures provides by Standard & Poor's. The fund returned 51.4% over the period, compared to the sector average of 56.5%.
Again, this weaker performance has left Russell open to criticism that he may be spending too much time on the hedge fund, but Brookes says the weaker performance is more about his investment style not performing well in the current stock market environment.
"Tim Russell has a large-cap style and is a business cycle investor. The past three years have simply not been an environment where this style and investment process have worked particularly well," he adds.
John Chatfeild-Roberts, who runs both funds of hedge funds (FoHFS) and traditional Fofs, says there is no distinct trend when it comes to managers who operate both types of portfolio. He says managers will encounter tough times in either type of fund at various times in their careers, but it is not necessarily the case that if a long-only fund underperforms it is because the manager is dedicating too much time to the hedge fund.
Indeed, there are certainly cases where the long-only fund will be an exceptional performer and the hedge fund weak. An example of this is Philip Gibbs, manager of the Jupiter Financial Opportunities fund. His long-only fund has been a long-term exceptional performer, but last year his long/short hedge fund did not fare so well.
Meanwhile, Brookes says one example of where both the long-only and hedge fund have remained consistent by all accounts is Ashton Bradbury, Old Mutual's mid-cap fund manager.
"This is a manager who has delivered consistent performance by all accounts in both funds. He obviously has a very robust process on both fronts," he says.
Brookes says there is no real evidence with managers running a long/short hedge fund that their long-only fund has suffered. He doubts managers would neglect their long-only funds to focus on the hedge offering.
"Working in a firm that actually has a large hedge fund business, I know there is no way any of our guys would deliberately do anything to undermine their long only fund," he adds.
Brookes says where managers run both long/short and long-only portfolios, in which Gartmore invests, it has been made very clear there is no conflict of interest.
"These managers do not short stocks that they hold in their long-only funds," he explains.
Although the rewards tend to be bigger on hedge funds, Brookes says quite a few firms nowadays are bringing in plans, whereby if the manager outperforms on the hedge fund but not on the long-only fund, their incentives on the former are reduced.
Chatfeild-Roberts adds that an interesting trend is traditional hedge fund managers are starting to offer long-only portfolios in addition to their other products. However, these are being launched with a performance-related charging structure. Examples are Cantillon, GLG and RAB Capital.
Brookes says in many cases, running a hedge fund alongside a long-only fund can be beneficial to the latter. "Generally, managers who run both types of funds will have hedge funds where the long book represents their long-only portfolios or a concentrated version of the same. Similarly, their short positions are either very big underweights or not held at all within the long-only fund.
Chatfeild-Roberts agrees: "Having a short book can crystalise the thoughts of a manager in relation to the underweight positions in their long-only fund. That is because they have to make a negative decision on stocks they do not like, rather than just ignoring them."
He says one side effect, however, is long-only managers could adopt a more shorter-term attitude to stocks they might otherwise have, as a result of looking at them in respect to shorting. Though, overall, he adds, this has not proven to be a major problem.
Similarly, Brookes says whether a manager also runs a hedge fund is something he considers when considering a long-only fund for Gartmore's Fof range.
"It is particularly interesting when the hedge fund is new to that manager to work out how the additional fund management duties fit, for example, trying to borrow stock, determine what the cost of stock is and so on. That will take time," he says.
"What a lot of groups do is have an operating officer who will come in and work alongside the manager," Brooke says. Meanwhile, if there is a hedge fund run by a long-only manager who has not performed well for some time, it is unlikely that Gartmore would be looking at it in the first place.
Chatfeild-Roberts says he also makes sure he is aware whether any long-only managers are running hedge funds and vice versa, but does believe it is a problem either way.
"It is really like a unit trust manager running segregated mandates elsewhere," he says. "It is likely a manager will have other duties."
He feels, in general, it makes little difference to either type of manager whether they run both types of portfolios. He concludes: "The jury is still out. I can't say it is good. I can't say it is bad. It is just different."
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