Will Amaranth Debacle Curb Enthusiasm for Hedge Funds of Funds?
Still, hedge fund returns have suffered in recent years, making it harder to justify the high fees on funds of hedge funds, which typically charge between 2 percent and 4 percent, or more, according to Ryan Tagal, director of hedge funds at Morningstar. “Fund of funds are supposed to produce equity-like returns with bond-like volatility,” says Tagal. “That story might have worked in the past.” But now, he says, the funds are more heavily correlated with the equity markets. “That’s the problem,” he says. “As there are more entrants into this space, the opportunities are shrinking. They’re not doing what they’re supposed to do.”
Through July, hedge funds averaged returns of 5.49 percent for the year, according to HedgeFund.net; funds of funds averaged returns of 3.87 percent. A decade ago, returns in the in the mid to high teens were common, says Tagal. Still, net asset flows haven’t slowed much: Year-to-date through the end of the second quarter, hedge funds brought in net new assets of $66 billion, and fund of funds amassed net new assets of $15.6 billion, according to Hedge Fund Research data.
Will the poor returns and spooky events like Amaranth turn Wall Street off? “It’s tough to say, especially on the advisor level, since the advisor in the high-net-worth market is still learning about hedge funds in the first place,” says Tagal.
Brian Schreiner, a retail advisor with Schreiner Capital Management, an RIA in Exton, Pa. says he has never been enthusiastic about hedge funds or funds, and he’s more leery now. “We believe in transparency and liquidity—and those are two things that hedge funds typically are not. What you see with hedge funds is there are inevitably these debacles, because basically these managers miscalculate the real risks involved in what they do.”
For his clients, Schreiner says, there are too many good traditional investments that can use a lot of the same strategies that hedge funds use. “There’s a lot of things that hedge funds can get involved in that we can never get involved in, like international real estate,” he says. “But a lot of good hedge funds will just use long-short equity, invest in metals or other commodities. Those are all things now that you can do inside of brokerage accounts.”
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