New York (HedgeCo.net) – Investor due diligence, managed accounts, the role of large hedge funds, and return expectations were industry trends highlighted by Hans Hufschmid, CEO, GlobeOp Financial Services at the Milken Institute Global Conference held in Los Angeles, CA.

Hufschmid’s panel – which also included executives from Albourne America, Coventry, The Ewing Marion Kauffman Foundation, The J. Paul Getty Trust and Skybridge Capital – debated the evolving world of alternative investments.

Highlights from Hufschmid’s comments include:

• Credit exposure became a major issue post-Lehman Brothers. That event meant hedge funds could not only lose money through markets, or a fraudulent manager, but also by having exposure to bad credit. Clearly investors are now focusing on who the fund is doing business with, what that counterparty credit exposure is, and how it’s managed.

Managed Accounts

• When you invest there is a great deal of operational due diligence required up front, in addition to analyzing the trading strategy and its merits.

• Until Madoff brought this to the fore in 2008, investors typically asked how returns were performing and whether strategies were adhered to. Then the key question became, “Are the assets actually there?” That is very important – everything else is moot if assets disappear through fraud.

• We see many large institutional investors working seriously to convert their fund investments to managed accounts. And 1.5 years after Madoff they’re still not up and running – that shows the complexities involved.

• For managers it’s also additional work to proportionally allocate trades to a separate account as well as to the main fund.

The important role of large hedge funds

• Smaller hedge funds are generally more nimble. Research suggests that in their first three years, hedge funds actually outperform – or at least these tend to be their best three years in business. However, if that’s really the premise of investing in hedge funds, we don’t have an industry. A large institution doesn’t have the infrastructure or the time to invest $20 million per fund in 100 different funds.

• Large funds probably have a competitive advantage in risk management, in infrastructure and in the investor base they service.

Hedge fund returns in a de-levered environment

• I object to a fund saying it will produce 8 or 10% returns, because that is a function of what the equity markets are doing and where interest rates are.

• When hedge funds started in the ’80s and early ’90s, the primary investors were wealthy individuals, who invested because the leading funds generated 30% returns. But it was 30% because the equity market at the time generated 20% returns.

• Now we’ve had a decade of zero growth in the equity market and I would expect hedge funds to outperform the risk-free rate by 3-6%. So a 5-8% return has become an acceptable return for a hedge fund.

Established in 2000, GlobeOp represents $115 billion in assets under administration (AuA). With headquarters in London and New York, offices are also located in Dublin, Ireland; George Town, Cayman Islands; Harrison and Yorktown Heights, NY and Hartford, CT, U.S.A.; and Mumbai (Bombay), India.

Editing by Alex Akesson
For HedgeCo.net
alex@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership in HedgeCo.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds!