There are too many hedge funds in operation
Jonathan Bell, CIO, Stanhope Capital, also says that robo-investing will present challenges for the hedge fund industry.
Tell us about hedge fund performance?
There are many types of hedge funds and some have performed very well over the last ten years. That said, the performance generated by the majority has been poor and this is reflected in the various indices. There is much more invested in hedge funds today than there was twenty years ago. It could be that as many operate similar strategies the industry may suffer from dis-economies of scale which means that they are more costly to use than in the past. As Warren Buffett has consistently pointed out in relation to his own performance, it is much easier to generate outsized returns with a small amount of money under management than it is with a large amount. This may not only be true for an individual investor, but also for the hedge fund industry as a whole.
What are your views on robo-investing?
It will present a problem for hedge funds. Computing technology, both software and hardware, have improved and become more widespread. As a consequence, arbitrage opportunities aren’t so available. Hedge funds have in the past found competitive advantage by getting knowledge before other market participants. However, tighter regulation has made it difficult to front run orders through faster trading or being given preferential access to brokers’ research.
What are the other problems in the hedge fund sector?
Banks have been less willing to lend money to gear portfolios plus the impact of low or negative interest rates today compared to pre 2008 makes it a difficult environment to deliver returns after fees. Also, as the barriers to entry are low the industry has too many funds, over 3,000 today, many of these funds have managers with poor investment skills who are dragging down the average performance.
Is Brexit a threat or an opportunity for hedge funds?
It shouldn’t make much difference to them. The hedge fund manager is a free-marketer who believes that although capitalism is not perfect it is more efficient at generating employment, growth and improved living standards with low regulation than it is with high regulation. As a result it is natural for the majority of hedge fund managers to be negative on EU and the prospects of increased regulation. Unlike other parts of the finance industry however, hedge funds are unlikely to be as affected by Brexit. In their case, it doesn’t matter where they operate and generally they are small operations compared to say investment banks.
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