Looking back

As we celebrate our 20th anniversary, my mind is drawn back to 1994 when we were among a handful of European Asset Managers providing hedge fund solutions – the year that saw a major bond rout when the US and then Europe raised interest rates for the first time in several years.  

Today, many investors are holding on to concerns from the 2008 financial crisis. Some of these investors will not even remember what happened in 1994, which is probably a more relevant reference point for today's market conditions. Nevertheless, investor's concerns are influencing their investment decisions and could be holding back long-term growth opportunities.

Institutionalisation of Hedge Funds

Over the last 20 years, we have seen the institutionalisation of the hedge fund sector. Today, the vast majority of capital flowing into the sector comes from pension funds. American pension funds and foundations are leading the charge. It is a somewhat different story in Europe and the UK, where many institutional investors have relegated hedge funds to the bottom of the list of investment options. I am not convinced this is a wise decision.

A combination of regulation and insufficient knowledge of the sector has resulted in this lacklustre interest in hedge funds. The asset class of choice remains the so-called

defensive, yielding assets instead. But these assets, such as sovereign bonds and corporate credit are now offering sub-par return profiles. The situation is even more severe in the context of questionable underlying credit quality. The long term impact that these fixed income investments will have on pension fund portfolios is uncertain.

Improved Governance

While a few isolated events have altered investors' views towards hedge funds, the industry has changed significantly since the crisis - with operational standards and governance structures having seen considerable improvement. The irony is that at a time when regulators have gone into overdrive, hedge funds have never been safer. Transparency, disclosure, liquidity, reporting and communication have all taken giant leaps forward over the last few years.

Very few of these positive developments were enforced by regulators – they were voluntary; hedge funds have gone much further than regulators have required.

Legacy issues

The lasting impact of certain events of 2008, as well as the tsunami of subsequent regulation, have pushed investors into a state of almost reckless conservatism. Fixed income investments continue to dominate at the expense of other investment options; notably hedge funds. European investors should consider the full range of options available to them; and alternatives should be chief amongst these.

An allocation to a well-structured hedge fund portfolio, where managers have been appropriately researched for their ability to produce returns throughout the market cycle, could certainly help bring an important balancing element to a traditional stock/bond portfolio. A particularly valuable element given the long-running equity bull market and the current valuation of bonds.