“Dispersion is so wide even within strategies so manager selection is the biggest driver of outsized returns,” BlackRock’s Woolley says. “Monitoring can be intensive and requires a large degree of transparency. Some investors are realising they are unable to effectively do that monitoring themselves and are going back to partnering with hedge fund solutions providers. Investors want the benefits of diversification across different risk factors and emerging managers who are more idiosyncratic in nature. They need a partner to help select managers and consolidate and explain the risk profile of their portfolio.”
The path of least resistance
Once investors look to small and mid-sized managers with better risk/return potential, the task of manager selection changes considerably. Chasing better returns becomes even more resource intensive. As Per Ivarsson, executive vice president and head of investment management at RPM Risk & Portfolio Management, says: “Once you get below a certain AUM size, the number of managers in the universe increases exponentially. Sifting through them requires special skills and a lot of time and resources to avoid taking the path of least resistance.”
The realisation of just how resource and skill intensive effective hedge fund allocations can be has driven many investors back to funds of funds as the ‘skill premium’ looks increasingly good value.
“The total cost is both the explicit and implicit cost; the implicit cost being the return foregone by making poor investment decisions,” Blackrock’s Woolley explains. “It is about establishing the total cost per unit of alpha and realising the partner approach maximises that ratio.”
For investors who may have made the same mistakes in direct allocations that cost them vital performance in old funds of funds, the evolved offering and more competitive fees funds of funds are now offering are once again proving attractive.
“Investors are realising they can get better returns by paying the extra 1% than doing all the research themselves or paying specialists in each market to do the same thing,” Bensted says.
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