Follow the Money
by Terry Stidham, President of Target Search Group
Q1, 2013 funding for VCs and for Private
Equity are up and according to Hedge
Fund Review, hedge fund industry assets surged by $122 billion to a record
$2.375 trillion, with the top ten
funds receiving the majority of the new capital. John Van, VP of Van Hedge Fund
Advisors reports that, “The average U.S. hedge fund is up 4 percent through March,
while the average equity mutual fund is up only 1.7 percent”.
Investors like the performance of late along with the flexibility hedge funds have to make among a broad set of short-term investments. Many strategies are being used (long/short equity, credit, macro, statistical arbitration, etc) with trades lasting from milliseconds to years. Most hedge funds are staying in relatively liquid securities so that they can trade out at any point in time to lock in their profits.
Sondra Harris gives us the following 8 Reasons Why the Hedge Fund Industry Deserves a Second Look in 2013 that she picked up from Michael Collins at the Investment Management Institute earlier this month:
1. Managers are better than ever - With the froth of the ’90s over, we are seeing less of the accompanying frenzy that had people putting money into hedge funds without really knowing what they were getting.
Today there is an expanding group of good managers, a better crop than we've ever seen, so the quality tends to be good, and because of the various market forces at work, their fees are going down.
2. Correlations in markets are down, and that’s a strong tailwind for hedge fund strategies - The high market correlations in recent years contributed greatly to dampened hedge fund returns. That’s changing. Spikes in correlation over the last 18 months are far shorter. That gives managers some breathing room and prevents whiplash. They can put on the trades, make a profit and move on. This type of environment should help raise the tide for all hedge funds.
3. Hedge funds are good bond alternatives - This is even more important for institutional investors like pension plans. They know that holding a portfolio with a 30/40 percent traditional bond allocation may be a potential time bomb. The free ride on their bond portfolio for the last 30 years is over. They’re all focused on it. Good hedge fund managers will either avoid unattractive bonds completely or profit from the inevitable sell-off.
Hedge funds can do very well in those sell-offs. Managers can short or actively trade a hedged portfolio of bonds, whereas, traditional bond funds cannot. Increasingly, investment advisors are substituting a diversified portfolio of hedge funds for part of their traditional bond allocation.
4. Holding periods are shorter; manager expertise is deeper - Geopolitical shocks and general market sentiment are driving hedge funds away from longer duration holding periods. Managers are using a variety of trading strategies, not just putting the position on, taking it off and going on to something else, but being able to trade it both ways and do that very profitably.
They can do this nowadays by relying on markets with deeper liquidity. This is good for individual investors, as well, whose own time horizon has come in dramatically in the last couple years.
5. It’s a buyer’s market for hedge funds - In general, redemption terms for all of the very best performing hedge funds will become more favorable as all funds are going to have to compete for assets. Frankly, it’s become a buyer’s market. Again, a good thing for investors. It also means more liquidity. In fact, liquidity has become as important an indicator as performance when evaluating hedge funds.
6. The general landscape for hedge funds will become even more populated - This will happen as the number of options for new and creative ways to trade and manage risk becomes more sophisticated. Investors who want to add hedge funds to their portfolios will need help from their advisor in selecting managers who can build a dynamic and diversified portfolio.
7. Fundamental long-short managers are paying a lot more attention to technical indicators - Traders have acquired new tools and quicker access to more data over the past couple of decades. These modernizations of hedge fund trading can improve managers’ abilities to protect their capital should the unexpected shock occur. Frankly, as we’re all beginning to learn, tail events seem to be the new normal. The good news is that the managers are even more aware and prepared to adapt quickly to different environments.
8. We’re seeing more and more hedge fund mutual funds - This used to be considered an oxymoron. It’s now becoming a necessity, driven by demand from investors who want even more transparency. They also want more liquidity, daily liquidity. They want daily NAV.
The funds that demonstrate performance and innovative strategies will continue to attract the bulk of the investors. Other major investor considerations are:
Investors like the performance of late along with the flexibility hedge funds have to make among a broad set of short-term investments. Many strategies are being used (long/short equity, credit, macro, statistical arbitration, etc) with trades lasting from milliseconds to years. Most hedge funds are staying in relatively liquid securities so that they can trade out at any point in time to lock in their profits.
Sondra Harris gives us the following 8 Reasons Why the Hedge Fund Industry Deserves a Second Look in 2013 that she picked up from Michael Collins at the Investment Management Institute earlier this month:
1. Managers are better than ever - With the froth of the ’90s over, we are seeing less of the accompanying frenzy that had people putting money into hedge funds without really knowing what they were getting.
Today there is an expanding group of good managers, a better crop than we've ever seen, so the quality tends to be good, and because of the various market forces at work, their fees are going down.
2. Correlations in markets are down, and that’s a strong tailwind for hedge fund strategies - The high market correlations in recent years contributed greatly to dampened hedge fund returns. That’s changing. Spikes in correlation over the last 18 months are far shorter. That gives managers some breathing room and prevents whiplash. They can put on the trades, make a profit and move on. This type of environment should help raise the tide for all hedge funds.
3. Hedge funds are good bond alternatives - This is even more important for institutional investors like pension plans. They know that holding a portfolio with a 30/40 percent traditional bond allocation may be a potential time bomb. The free ride on their bond portfolio for the last 30 years is over. They’re all focused on it. Good hedge fund managers will either avoid unattractive bonds completely or profit from the inevitable sell-off.
Hedge funds can do very well in those sell-offs. Managers can short or actively trade a hedged portfolio of bonds, whereas, traditional bond funds cannot. Increasingly, investment advisors are substituting a diversified portfolio of hedge funds for part of their traditional bond allocation.
4. Holding periods are shorter; manager expertise is deeper - Geopolitical shocks and general market sentiment are driving hedge funds away from longer duration holding periods. Managers are using a variety of trading strategies, not just putting the position on, taking it off and going on to something else, but being able to trade it both ways and do that very profitably.
They can do this nowadays by relying on markets with deeper liquidity. This is good for individual investors, as well, whose own time horizon has come in dramatically in the last couple years.
5. It’s a buyer’s market for hedge funds - In general, redemption terms for all of the very best performing hedge funds will become more favorable as all funds are going to have to compete for assets. Frankly, it’s become a buyer’s market. Again, a good thing for investors. It also means more liquidity. In fact, liquidity has become as important an indicator as performance when evaluating hedge funds.
6. The general landscape for hedge funds will become even more populated - This will happen as the number of options for new and creative ways to trade and manage risk becomes more sophisticated. Investors who want to add hedge funds to their portfolios will need help from their advisor in selecting managers who can build a dynamic and diversified portfolio.
7. Fundamental long-short managers are paying a lot more attention to technical indicators - Traders have acquired new tools and quicker access to more data over the past couple of decades. These modernizations of hedge fund trading can improve managers’ abilities to protect their capital should the unexpected shock occur. Frankly, as we’re all beginning to learn, tail events seem to be the new normal. The good news is that the managers are even more aware and prepared to adapt quickly to different environments.
8. We’re seeing more and more hedge fund mutual funds - This used to be considered an oxymoron. It’s now becoming a necessity, driven by demand from investors who want even more transparency. They also want more liquidity, daily liquidity. They want daily NAV.
The funds that demonstrate performance and innovative strategies will continue to attract the bulk of the investors. Other major investor considerations are:
- Investment Objective: Is it lower volatility, enhanced return, less correlation to other investments, etc?
- Structure: Is the fund have a single manager /
strategy fund to build out an allocation or is it a fund of funds?
- Team: What is the makeup of the investment team in terms
of diversity, experience and history, and the culture of the overall
organization?
- Sophisticated Risk Management: Is risk management an independent function that
provides checks and balances to the investment process?
- Operations: Does the fund have a sound operational infrastructure backed by dedicated support groups (e.g. legal, technology, due diligence) to allow the investment team to focus solely on investing?
- Improved Transparency
Terry Stidham is the
President and founder of Target Search Group. He is a Business
Development Leader with extensive knowledge of the M&A process, combined
with an in-depth understanding of the constantly changing global capital
markets environment. He has served as the head of entrepreneurial
organizations as well as Fortune 500 companies. He specializes with
mid-market companies in a diverse array of industry sectors from service and
manufacturing to technical and professional firms.
Mr. Stidham speaks
the language of both the seller and the buyer having vast experience on both
sides of the transaction. He has been directly involved in the execution and
successful closing of hundreds of investment banking and corporate finance
transactions. Mr. Stidham has been instrumental in aiding thousands of
business owners prepare their businesses for eventual sale by teaching them how
to maximize efficiencies in operations leading to significant increased cash
flow.
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