The decision by Calpers CEO Ted Eliopoulos to discontinue hedge fund strategies for Calpers, an entity worth over £200bn, it sent waves through the financial industry. But management always wants more out of their money, so what gives? This yearly review will examine the subject.
Even the other U.S. institutions, long advocates of the advantages of hedge funds, are taking note, with investors at large firms criticizing the recent performance of hedge funds. However, only betting long on stocks can be dangerous, leaving them exposed to drawdowns in the future. That’s why some investors are still putting efforts into hedging.
In order to get a better rate of return, investors can choose smaller funds to remain flexible or they can change the fee structure to be more liquid and dynamic. This could help management fees become more reasonable, with the focus on performance instead of retainers. Some fees are as high as 25 percent, a number that many analysts feel is too high for the services rendered. If the fees evolved to a more results driven model, increased efficiencies could be seen that boost bottom line revenues.
It seems, from reports, that smaller funds are actually providing better returns for their size than smaller funds. It would also seem that it is easy to have a few large allocations floating in the market, so that bigger firms can use their analysis to predict cost structures and risk vulnerabilities at an earlier stage. However, most smaller investors may want to leverage their current assets with a strategic debt, such as smaller funds allow.
When institutions discover that smaller hedge funds are actually outperforming larger ones, they can move forward on these assets without sacrificing any operational integrity. Even if we don’t consider one of these mentioned fund approaches, the year’s average AUM is under $395m. Over five years, annual return rates where around 15% as of the summer of 2014. Drawdowns were only around 11% and yearly volatile rates fell to 8% from previous estimates.
In terms of what helps these funds remain so above average, Willardson, a Paamco executive, said that he would look for mispricing of certain assets. That strategy combined with disciplined commerce on both ends and an eye for factors outside of the economic realm will be any good investor’s base going forward. Of course, one would need a variety of additional properties. For one, one must concentrate their portfolio presence and leverage opportunities that sit in the middle of the market – promoting stability. If people are willing to infuse cash in order to avoid dilution, certain managers predict that their funds could stay healthy and return to being a powerful asset that trends positively with the market.
It seems that hedge funds are not dead yet. Although cannot recommend these funds, their track record shows signs of solid strategizing. If their future performance mirrors what we are seeing today, it is very possibly a good investment to make. Of course, this review is merely a surface overview of what we are seeing in the market. Truly, each investor must consult their own assets and analysis team to assess the financial instruments that will fit their investment situation.