Growing Emerging Hedge Funds

I have been invited to be a guest author on another blog:  Simon Kerr on Hedge Fund.  The article, seed capital for hedge funds, can be accessed here.

Barbell Allocation Model Causes Flight from Mutual Funds

Since the credit crisis where the Standard & Poor's 500 fell 37% in one year, there has been a flight from the traditional equity mutual funds to fixed income, index and alternative funds.  The old model, where an investor was diversified based on style (growth or value), capitalization and geography, is no longer performing well.  They are gravitating to a barbell model with allocations to passive indices and alternative investments.  According to eVestment Alliance, $90 billion and $29.3 billion were redeemed from US large cap growth and value equity funds.  This is pressuring traditional asset managers and subsidiaries of banks and insurance companies to change their practices.

For example, Francis Ghiloni, director of distribution and client management for Scottish Widows Investment Partnership (SWIP), noted that the barbell approach is more popular since traditional investments are encountering higher volatility and risk.  SWIP re-organized their investment team along global lines, replacing the former regional coverage model, and promoting their quantitative research team.  Aviva Investors is also moving assets from fundamental to quantitative analysis teams.

The source for this article can be accessed here.

Assets Surge into Activist Hedge Funds

According to an article in Pensions & Investments, institutional investors have started the trend of classifying their asset allocation to alternative investments based on their type of asset (equity, fixed income or commodities) instead of in a separate bucket.  This has fueled an increase of capital into activist hedge funds such as ValueAct Capital Management. Starboard Value and Cevian Capital in the second half of 2011 and first quarter of 2012.  The reasoning behind placing them into the equity classification is that they hold long positions.  The Florida State Board of Administration recently invested $125 million in Starboard.  The New Jersey Division of Investment, New York State Common Retirement Fund and Virginia Retirement System placed $600 million with Cevian Capital.  Overall, the investments in managers with a constructive approach are larger than the more aggressive approach favored by Bill Ackman of Pershing Square Capital Management and Daniel Loeb of Third Point.  Some of the larger funds that work with company management to improve their share price are Cevian Capital, JANA Partners and Paulson & Company.

Activist hedge fund managers keep their holdings for a longer period of time than other fund managers.  They need time for their campaigns to improve the value of the stock.  According to Stephen Nesbitt, CEO of Cliffwater LLC, the strategy has strong, uncorrelated returns in the last five years.  For a sample selection of eight funds, the return was 8.6%.  The Russell 3000 Index's return was 0% and the Morgan Stanley Capital International All Country World Index returned 2.8% for the same time period.  This is a natural attraction for pensions, endowments and foundations.