GSAM sees better hedge fund times ahead

Feb 14, 2017

But getting investors to allocate more capital to the asset class may rest on a more rational approach to fees, says manager selection specialist Robert Mullane.

The more central bank policy diverges globally in 2017, the more hedge funds will have “great opportunities” to generate superior investment returns.

So thinks London-based Robert Mullane, managing director in the alternative investments and manager selection group at Goldman Sachs Asset Management.

But in order to convince investors to allocate more of their capital to hedge funds, fee discussions are becoming more important, he said in an interview with AsianInvestor in Hong Kong yesterday.

Mullane said demand for liquid alternatives is picking up among Asian private banks and institutional investors, which is why he is in Asia this week meeting clients.

In particular, investors liked Ucits-compliant hedge fund strategies that offered daily liquidity, he said, echoing similar comments by Deborah Zurkow, head of alternatives at Allianz Global Investors, in conversation with AsianInvestor in January.

Offering further evidence of the increased investor interest, Mullane said the Goldman Sachs Global Multi-Manager Alternatives Portfolio was launched this week on the HSBC Private Bank platform.

However, other banks contacted by AsianInvestor in the last two months said their clients were still less than keen about the hedge fund asset class due to disappointing recent returns and high fees. Both LGT and Deutsche Wealth Management, for example, are neither planning to add nor advising clients to overweight the hedge fund asset class.

Hedge funds in aggregate posted a 4.74% return in 2016, compared with a 7.76% gain in the S&P 500, according to data provider eVestment. Overall, the hedge fund industry went through a tough year in 2016 and experienced a $106 billion net outflow globally. That represents about 3.5% of the total assets in this asset class, which stood at $3 trillion as of end-2016, eVestment data shows.

Fee discussion

One chief investment officer at a major Asia life insurance company told AsianInvestor in January that he didn’t feel like looking at hedge funds because their performance hadn’t beaten his firm’s internal management in the past few years. What is more these funds charged a lot, he said, which “doesn’t make sense”.

Mullane (pictured left) said GSAM was trying to address the fees issue. “We've done a lot of work in the last year, a particularly aggressive project to work with managers to discuss and debate the appropriate level of fees,” he noted.

Typically, GSAM’s clients buy the firm’s fund of hedge funds and GSAM selects the underlying managers within the portfolio. “We are able to work hard with managers and negotiate lower fees with them, on behalf of our clients. So a big part of the value proposition of us is our ability to negotiate on behalf of our clients,” Mullane said.

In this, GSAM doesn’t just start by asking for a discount, he said. “We discuss like ‘these are the returns that you delivered and these are the fees you charge and this is the alpha share – how much the alpha goes to you as the fees and how much comes through to investors?'”

Mullane said managers appreciated that discussion, which had succeeded in either changing the structure the way the fees are charged or just moving the levels lower.

The industry has long adopted the standard fee model – namely a 2% management fee and 20% performance fee. But GSAM, Mullane said, had few examples where it paid that. “Typically, new launches for us, if we invest in a new manager, that is a 1%-10% level,” he said. The fees paid to its other managers ranged between that level and the standard 2%-20% model.

Mullane said the single-layer fee structure was also gaining traction with its investors. According to this model, investors only pay a management fee and performance fee to GSAM, which then pays the sub advisors or underlying managers in its fund of hedge funds portfolio. A common practice is for investors to pay both the fund of funds manager and the sub advisors.

Divergence

Mullane noted that central bank intervention, not least the convergence of interest rates towards record lows and quantitative easing, was widely blamed for the underperformance of hedge funds. Such intervention dampened somewhat the natural volatility of the market.

“Naturally, a lower level of interest rate creates a lower level of market volatility, which can dilute some of the opportunities for managers,” he said.

Fortunately, we're seeing some central bank policy divergence coming back, and that means less intervention and potentially higher interest rates, Mullane said. That’s typically very good for global macro strategy, especially fixed income and FX investment strategies.

Mullane said he also expected emerging markets to generate alpha this year. In January, emerging market strategies posted a 3.37% gain, compared with just a 1.24% rise in developed markets, according to eVestment.

AsianInvestor and Goldman Sachs Asset Management are gathering views on cash management from top decision-makers in the hedge fund industry for the Asia Liquidity Survey 2017. The survey should take no more than five minutes. Click here to have your say.