Risk Management Watch: Hedge Funds Focus on Risk as Assets Grow
Institutional investors remain strongly committed to hedge funds, despite last year’s downturn in performance, according to a recent study by Greenwich Associates and Global Custodian. Watson Wyatt’s Global Alternatives 99 research also shows that alternative assets managed on behalf of pension funds by the world’s 99 largest investment managers grew by 40% to $822 billion from $586 billion last year. Looking ahead, Greenwich Associates says 23% of U.S. institutions plan to increase their allocations to hedge funds beyond current levels by 2010. A separate KPMG survey also contends that pension funds are expected to double their allocations to hedge funds to an average of 8% from 4% within three years – despite market volatility, according to Reuters.
Despite the subprime debacle, hedge fund assets have grown to more than $2.9 billion, jumping 20% in the past year, according to the 9th biannual HFMWeek Hedge Fund Administrators Survey. “The movement of assets into alternatives has continued unabated despite the high fees and costs and the mixed ability of managers to deliver good performance,” said Roger Urwin, Global Head of Investment Consulting at Watson Wyatt. Now, as their assets continue to grow, hedge funds are still looking to hire the best and the brightest. Mitch Feldman, President of executive search firm, A.E. Feldman, says hedge funds need people to manage the trillion-dollar industry. He adds that emphasis on risk management jobs is building. Continued growth of assets under management at hedge funds is also opening doors for back- and middle-office staff. Opportunities exist in hedge fund accounting and administration as well as investment operations.
“There is no letup in the demand for alternative assets as pension funds around the world seek to diversify their portfolios and capture alpha through absolute return strategies,” says Urwin.
Investment in Hedge Funds Grows
In the United States, which accounts for the vast majority of global institutional hedge fund investment, nearly 45% of institutions invest in hedge funds, the Greenwich Associates and Global Custodian study. That means investment in hedge funds grew to represent 2.6% of institutional assets as of 2007 — up from 2.2% in 2006 and 1.9% in 2005. Putting this in perspective…converted to dollar terms, U.S. institutions’ investments in hedge funds totaled roughly $195 billion in 2007, up from $140 billion in 2006 and $113 billion in 2005.
Pensions and endowments directly provide 13% of the average hedge fund’s assets under management, according to Greenwich Associates and Global Custodian. The study also shows that institutions also commit assets to hedge funds through their investments in fund of funds, which account for an additional 23% of hedge fund assets.
For the world’s biggest hedge funds, in particular, institutional investors have overtaken high-net worth (HNW) individuals and family offices as a source of assets, accounting for 25% of the total. “In terms of importance to funds with more than $1 billion in assets, both of these sources rank behind fund of funds, which provide 27% of total assets, up from 25% a year ago,” says Greenwich Associates Consultant, John Colon.
Institutions Committed to Hedge Funds
Institutions’ commitment to hedge funds is due in large part to the key role that hedge funds play in sophisticated portfolio management models that were first developed by endowments and foundations - the same models that are now being adopted by pension funds, according to the study. These models were designed to encompass “non-traditional” or alternative assets, including heavy use of hedge funds, which are viewed as having a low level of correlation with traditional fixed-income and equity holdings.
Institutional interest in hedge funds also received an additional boost from new hedge fund-style investment strategies that have been rolled out by both hedge fund managers and traditional asset management organizations looking to attract institutional dollars. For instance, 11% say they are active in 130/30 strategies. “Hedge fund managers are creating new funds in which they dial down leverage and shorting activity to attract institutional investors, and they are also creating funds featuring their best long-only investment ideas,” says Greenwich Associates Hedge Fund Specialist Karan Sampson.
Hedge Funds Focus on Risk
Joining the long list of investment banks that have added new Chief Risk Officers, hedge funds are also sharpening their focus on investment risk in the wake of the credit crunch. According to Watson Wyatt’s Urwin, “There are signs of change as we move into a different market environment where managers will have to work harder to justify their charges. The trends we see are: more need for transparency, an increased focus on risk; and the increased appetite for direct investment in private equity and hedge funds.”
With more than $3.2 billion under management in both long and long/short strategies, London-based Polar Capital has hired Karim Vellani to fill the newly created role of Chief Risk Officer, according to HedgeWeek.
Previously head of risk management for the global proprietary trading business at Credit Suisse, Vellani’s areas of responsibility included all the group’s hedge fund strategies, comprising long/short, event-driven, relative value, energy and commodities, fixed income, statistical arbitrage, macro, convertible bond arbitrage and credit arbitrage, as well as private equity.
HedgeWeek quotes Polar Capital Chief Executive Mark Kary as saying, “With 18 years experience in wholesale financial markets across multiple asset classes including equities, fixed income and currencies, Karim is the ideal choice to further build on Polar Capital’s risk management program.” He goes on to say, “A comprehensive and consistent approach to risk forms an integral part of our organization and is essential for ensuring that Polar Capital continues to operate and develop efficiently.”
Following in the steps of Polar Capital, Ramius Capital Management has also taken steps to bolsters risk management, according to FINAlternatives. Ramius, which manages about $12 billion in assets, across multi-strategy and single strategy hedge funds and funds of hedge funds portfolios, has hired Vikas Kapoor as Risk Manager for its fund of funds group. He joins Ramius from Arden Asset Management, where he was a Risk Manager.
Kapoor will oversee risk at Ramius’ $3.8 billion fund of funds joint venture with German bank Bayerische Hypo-und Vereinsbank.
