The cutting hedge for private clients
Pythagoras theorem offered itself up as a plate of utter confusion when at school and now it seems hedge funds are having a similar effect. The Chicago based Spectrem Group found that 1 in 5 well off individuals didn’t understand them. Mark Seaman, Principle Consultant at the Ethios Group, who is working on a research project into the future of the fund of hedge fund industry, thinks it is a concern if this is the case. “Moves by the FSA to bring these products under the onshore regulatory umbrella will ease this problem” he says.
For starter, Dan Kemp, Fund Manager and Head of Research for Williams de Broe say they work with IFA’s to help counsel clients about hedge funds. Kemp says clients on average put ten to fifteen percent of their portfolio into hedge funds using Signet, GAM, Gottex Fund Management and the Cazenove equity based listed funds of hedge funds. “We like the listed funds because clients get capital gains tax allowance.”
Phil Cutts, VP and Director at RBC private banking, who have invested ¬£10bn into hedge funds has recently published a book to explain the long and short of hedge funds for the confused private client. Entitled “What is a hedge fund” it explains the strategies and risks involved. He says clients who have more than $1mn to invest would usually hand over discretionary power so that he would make day to day decisions.
RBC don’t buy single manager funds “we only go for fund of funds” to mitigate risk and for diversification.” He is also rather pleased with a recent launch: the “RBC hedge fund 250 index.” Cleverly, one of the RBC rules imposed on the participants is that the hedge fund managers must provide reporting, something that is known to be quite difficult to achieve and would attract criticism about accuracy if they didn’t. “The tracker allows the affluent client base access to a variety of hedge funds, even closed ones. We normally look for ¬£/$50,000 directly but anyone can invest for as little as ¬£10 from a broker in either sterling, euro or US.”
Jeremy Beckwith, CIO at Kleinwort Benson says they undertake a ‘fact find’ at client inception. “We try and find out what they understand.” Kleinwort Benson don’t invest in individual funds directly but use the fund of fund route tending to identify funds that work with family offices because of the similarity in investor culture. The bank work with Ajia Partners who are biased toward Asia and with the Ramius capital Group in New York. Beckwith says “You need as much diversification as possible for this audience so we steer away from single funds.
Craig Lewis, CIO of Credit Suisse in the UK, with private clients investing on average around twenty percent or more of their portfolios into alternative funds delivers our main course. His advice would include asking about how easily you get your money back and redemption penalties. He also thinks it’s worth asking about leverage and perform ongoing due diligence in case there is “style drift.”
Of the suitability of single manager hedge funds, Lewis says. “There must be due diligence, in-depth working knowledge of the management team and unrestricted access to their risk controls.” Lewis also says that structured products continue to be important. Credit Suisse are investing resources into an electronic trading technology called “Straight through Processing” (STP) which will help reduce risk, fees and speed up trade processing.
Russell Bussey, VP at Alliance Bernstein who have $742bn under management of which $100bn is private money makes a point about taxation. “Gearing, tax and fees are important issues which can affect what the client expects as a return and what is actually generated. Multi-Manger can be useful for clients but control of internal costs and fees needs to be in place”
Tim Bell, Managing director and head of hedge fund advisory at UBS Wealth Management in the UK says this is undoubtedly right. “With the press highlighting the sensational side of hedge funds, I think it’s more important that we ensure clients have realistic expectations of risk and return rather than and understanding of the technical details. He says “Unless a client is an experience hedge fund investor it’s unlikely they will know very much about hedge funds or what to ask us. Many clients want to learn more and some ask us for books to read although ultimately they need expert advice to establish their investment objectives more fully and build a properly constructed, diversified portfolio. Funds of funds are appropriate for most clients but for the extremely wealthy, we are happy to customize a single manager hedge fund portfolio at a starting point of $10mn but it really comes down to the clients needs.”
Anthony Yadgaroff, Chairman at Allenbridge Plc who are an independent hedge fund rating consultant tipped me off about Michael Perotti, CIO Alternative Strategies at UBP, London. Managing $35bn in this area exclusively, UBP has been a private bank since 1969 and opened in London in 1991. It is majority owned by the originating de Picciotto family who have connections to hedge funds spanning thirty years.
Perotti whose past career included a decade at Coopers & Lybrand, says high net worths should understand alternative investments without compromise. Perotti says “diversification is also crucial for the private client.” UBP only recommend fund of funds or highly diversified allocations to twenty or thirty single hedge fund managers. “Concentrating on a few single managers can mean risk is underevaluated.” Perotti believes in the funds of funds route married with experienced advisers with a long track record. Terry Mellish, Head of institutional business in the UK also at UBP, with thirty three years previously spent at Schroders adds “In addition to strong quantitative investment research, UBP has put emphasis on back office and admin’ issues to help the research process.” UBP has a team of one hundred and thirty who are dedicated to hedge funds and they enter into partnerships with other institutions.
The icing on the cake was from Daniel Pinto, Managing Partner and Chairman of Stanhope Capital who are a leading family office and aren’t convinced by automatic allocation into hedge funds. “You can’t put twenty percent into hedge funds and treat is as a separate pot. One of our concerns with banks is that they’ve given clients an asset allocation and talked about diversification but many may be doubling up exposure to equities if they have equity investment then choose a hedge fund allocation using an equity strategy.” Jonathan Bell, CIO at Stanhope adds. “The other attention seeker is the index structure but they will never be as transparent as equity indexes and are operating with historic analysis only.”
Guy Paterson, Chief Executive of the Family Investment Office at Unigestion finishes our gourmet education. “Many banks market their funds of funds aggressively but underlying managers have limited capacity so the quality of investment management will drop. We have Anne Tschanz, a specialist with a twenty five year track record in hedge fund research and management. We also limit offerings to clients so that returns flourish.”