The booming hedge fund market is creating a crisis in the investment management industry by destabi...
The booming hedge fund market is creating a crisis in the investment management industry by destabilising the long-only market, believes Stephen Lowe, investment consultant for Railpen Investments, writes John Butcher.
Investors looking to invest with top long-only managers feel less confident in the commitment of managers, who could be lured away by the promise of high fees in the hedge fund industry, he said.
In addition, there are long-only managers who are also running hedge funds, which, he believes, represents a dangerous conflict of interests.
'I am going to suggest that, in the end, the hedge fund phenomenon must burn out,' he told a conference of hedge funds for pension funds in Amsterdam last month.
Managers capable of managing a hedge fund are unlikely to stay with large traditional asset management companies, he said, unless they are offered incentives, such as the opportunity to run a hedge fund.
A manager running a hedge fund and a long-only fund is unlikely to add equal weight to each side of his work when the incentives on one side are so much greater, he said.
If, for example, good investment opportunities arise, but in an area with limited capacity, the manager is more likely to invest with their hedge fund first in the chase for high performance fees.
Combining hedge funds and long-only funds can be damaging for large asset management companies, according to Nick Train, director of Lindsell Train, which runs both a hedge fund and long-only funds.
'It is disruptive in a traditional long-only house to have hedge fund activity, unless it is completely ring-fenced, and even that can be very divisive,' he said.
Large investment houses tend to rely on idea sharing and teamwork. Hedge funds are not about teamwork, said Train.
A team cannot run hedge funds and hedge fund managers may have to make decisions that could be damaging to the rest of the team, he said.
Most big institutions have put heavy emphasis on the team-oriented investment process and could find hedge funds within the organisation disruptive, he added.
Train accepts that there could be a conflict of interest for a hedge fund manager who also runs a traditional long-only portfolio.
'It is not the case for us but I can see how it might be so, and it would be a failure of compliance if it did happen within a company,' he said.
With regard to investors developing a lack of confidence in good fund managers because they may be likely to leave to run a hedge fund, Train believes this is more likely to be a problem in the retail market.
'Institutional businesses go to great lengths to minimise star individuals within the process and rely on the process and the team,' he said.
'So I don't know whether an average investor in a traditional institution is concerned about what happens to an individual manager. It may be different in the retail sector, where there has been more of a cult of the individual.'
There has already been a gravitation of good managers towards the hedge fund market, according to David Smith, chief investment director, multi- manager group, Global Asset Management.
Talented managers either go it alone in the hedge fund market or start an in-house fund, he said.
Asset management companies are 'planting the seeds of their own destruction,' by allowing talented managers to run in-house funds, he says. Many are only doing so on a temporary basis because returns are low, said Smith, when markets improve and they have gained experience and a track record they will likely leave.
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