Investors are pushing hedge funds towards the use of relative rather than absolute measures of performance, which could create pressure on fees, hedge fund industry figures said. And pension funds have been applying the strongest pressure.
Hedge funds, which can use tools such as derivatives and short-selling to help protect assets and make money when markets are falling, have tended to measure their performance in absolute or real returns, according to speakers at a recent Reuters Hedge Fund Private Equity Summit.
In contrast, traditional fund managers tend to measure performance against benchmarks and against rival funds, though some are beginning to adopt absolute measures of performance.
However, speakers at the conference in London this week said there was investor pressure on hedge funds to look at benchmark measures of performance.
“Hedge funds hate benchmarks. They try to demonstrate that what they’re trying to achieve is alpha, not beta,” said Nicholas Roe, managing director for European equity finance at Citigroup. “(But) investors’ habit is to push towards relative performance. Unfortunately, it’s the way of the world; people love to have something to compare performance with.”
Beta returns track stock or bond market trends, while alpha measures returns regardless of market movements, Reuters reported.
Nils Tuchschmid, head of multi-manager portfolios at Credit Suisse, said it was pension funds — of which US schemes have tended to invest more in hedge funds than UK counterparts — that are applying the pressure.
Hedge fund managers don’t measure performance against benchmarks, he said.
“(But) with pension funds, the natural tendency is to think about benchmarks. They (hedge funds) are starting to compete with classic long-only benchmarks. This is potentially a danger for the industry.”
Last month Patrick Armstrong, a fund manager at Britain’s Insight Investment, told Reuters he was “very worried” by anecdotal evidence that hedge funds were increasingly focusing on relative performance and beta rather than absolute returns.