Talk of the decline of hedge funds has been rumbling on in one form or another for years but the industry took what many see as a particularly grievous blow this week. PMT said on Friday they will divest their hedge fund portfolio of €1bn, according to IPE. Their hedge fund portfolio, which holds less than 2% of assets, currently accounts for 32% of PMT’s total management costs, PMT said. The pension scheme for Dutch metal workers will replace their hedge fund holdings with another alternative investment, Dutch residential mortgages.
The Dutch pension fund is not the only organisation abandoning their participations in hedge funds. Californian state pension fund Calpers announced on Monday that it is cutting hedge funds out of its portfolio. Due mainly to its vast size, Calpers is often considered an investment industry leader and trendsetter.
Hedge funds were a very small part of the Calpers portfolio relatively speaking, just $4bn of $300bn, so it is not the withdrawal of the money itself which is the concern, it is the signal it sends.
Other pension funds and institutional investors are likely to be prompted to at least reconsider whether the benefits of their hedge funds allocations outweigh the costs, while some may just follow recent examples without much independent scrutiny.
Although wealth managers are engaged in a different endeavour to managers of large pension funds, news of Calpers’ decision will have reached them too of course and raised the subject in their minds.
If Calpers has run the numbers and found the benefits of a hedge funds allocation do not sufficiently outweigh the costs it is at least possible that many wealth managers would reach similar conclusions if they scrutinised their hedge fund investments in the same way.
Another less quantifiable difficulty hedge funds face in an investment industry constantly being pushed to increase transparency and accountability is their opaque nature and association with elites and the super-rich. These factors may make it increasingly attractive for money managers to take a strong stance against them.
It is not necessarily all doom and gloom however, hedge fund managers will be pleased to know. It could be more a situation where adaptation and evolution is forced upon them rather than extinction.
“The Calpers move will likely be followed by other big investors and I think hedge funds will be further squeezed out of portfolios generally to some extent,” said Jonathan Bell, CIO of wealth management firm Stanhope Capital. “They are a relatively expensive way to achieve diversification when compared with other options like private equity, so over the long run exposure to them should be kept low,” he added.
Hedge fund respond
It not all bad news as hedge funds have begun to adapt in response to all the criticism faced in the years following the 2008 financial crash, and this could be a big help in keeping favour with wealth managers.
“Hedge funds are better placed today than they were five years ago in some ways because they have begun to move away from the traditional 2 and 20 fee structure and the long lock-ups,” Bell said.
Another ray of light according to Bell is that specialised hedge funds such as merger arbitrage funds can offer a unique proposition, the benefits of which cannot be replicated by any other type of investment.
Two things seem clear. Hedge funds are here to stay, but a squeeze is on which is going to mean they take a smaller slice of the wealth management pie and those which adapt best will be the survivors.
