Investors are more and more cautious about big-name funds that either try to do everything or manage such vast sums of money that they can’t maneuver in increasingly illiquid markets.
Ed Rogers of Rogers Investment Advisors, an Asia-based alternative investment advisory firm, points out that many brand-name hedge funds have suffered dreary returns, in part because the owners and managers of $10 billion-plus firms “spent too much of their time trying to retain/gather assets and too little time managing what they had. The trend to smaller-sized and probably better managed (from the performance perspective) hedge funds is real and smart investors will take note.”
This isn’t just an issue in the macro hedge fund world of course. The scandal that took down the star fund manager Neil Woodford shows that getting too big and too illiquid is a peril for stock-pickers too.
Things have never gone quite so badly for Alan Howard, but he has experienced the dangers of overstretching. The firm’s assets under management once exceeded $40 billion, an unwieldly beast with which to consistently deliver positive returns — especially when you add in leverage. They are now a more manageable $7.5 billion, and the performance of the Brevan Howard master fund has improved in the past couple of years. It rose more than 7.5% between the start of 2019 and September.
Like several hedge fund peers, he’s focusing entirely on what was the unique selling proposition of the firm in the first place: betting on the name of the person on the door. Howard’s one-time protege Chris Rokos is also taking greater control of the investment decisions at his eponymous Rokos Capital Management. Greg Coffey, previously a star manager at several funds, has done very well striking out on his own at Kirkoswald Capital Partners.
Another option is to eschew outside money entirely, as Coffey’s long-time rival Mike Platt did at Bluecrest Capital Management in 2015. But if star fund managers want to keep investors happily on-board, then it’s back to creating that secret sauce known only to the founder. Otherwise the simpler and cheaper fare of exchange-traded funds becomes too tempting.
(This column was updated to clarify the fund performance in the sixth paragraph.)
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Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.