Alts Are Useful, But Hedge Funds Too Expensive: CIO Panel

Alts Are Useful, But Hedge Funds Too Expensive: CIO Panel

The perception among too many investors is that hedge funds are plagued with high fees, shady managers and gimmicky marketing campaigns. And as an industry, alternative asset managers have not done enough to challenge that perception, and make the case that hedge funds aren't always meant to outperform the market, but provide some ballast to a portfolio. Yet too many hedge fund investors didn't see that protection during the financial crisis, or make amends.

“I think the hedge fund world probably dropped the ball on fees post-crisis,” David Kupperman, co-head of alternative investment management at NeubergerBerman, said during a panel on alternative investment strategies n Wednesday at UBS Global CIO Forum.

Following the financial crisis in 2008, some of these strategies struggled, Kupperman said. He said it was a mistake of hedge fund world not to examine at what they can deliver and then determine what makes sense to charge.

And puting their strategies inside mutual funds for the retail market should also make managers examine the high fees they charge for the private placements. 

Bill Ferri, UBS Global Asset Management's head of alternative investments, also took aim at the marketing of the strategies, most notably the "absolute return" label put onto strategies meant to lower an overall portfolio's volatility. “I’m glad we don’t call it that anymore,” says Bill Ferri, UBS Global Asset Management’s head of alternative investment solutions.

“There’s no such thing as absolute returns, nothing makes money all the time,” Ferri says. He added that he would be cautious in recommending any product using the term absolute return with clients.

But despite the fact that CALpers turned away from hedge funds, citing their expense and complexity, they have doubled their assets under management since 2008. 

The panel recommended alternatives as a diversification tool for a minimum 5 percent of a client's portfolio. “If you’re using less than 5 percent allocation in alternatives, your client is not going to feel the benefits of that,” said TP Enders, senior strategist at Goldman Sachs Asset Management. He added that investors should probably have no more than 20 percent of their portfolio in these assets.

Interestingly, in WealthManagement.com’s All-Channel Benchmarking survey, advisors on average reported investing 5.11 percent of their clients’ portfolios in alternative assets such as hedge funds, managed futures and commodities.

“Hedge funds haven’t done well in last few years, let’s be honest,” Kupperman says, adding that there have been a host of bad companies in bad sectors and it’s been a very challenging area. “But we’re finally coming out of it.”

 

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