WEBVTT - Hedgemark's Lapkin on Challenges to Hedge Fund Investing(Audio)

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<v Speaker 1>Broadcasting live to New York Bloomberg eleven, Rio to Washington,

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<v Speaker 1>d C. Bloomberg to Boston, Bloomberg Well, Undige to San Francisco,

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<v Speaker 1>Bloomberg nine to the Country General one nineteen and around

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<v Speaker 1>the globe the Bloomberg Radio and Bloomberg got gog. This

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<v Speaker 1>is taking Stock. Coming up on taking stock. New York

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<v Speaker 1>City's employees retirement system, fifty one point two billion dollars

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<v Speaker 1>of it is looking at to exit its hedge fund positions.

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<v Speaker 1>We're gonna find that is this a trend in the industry.

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<v Speaker 1>We'll be speaking with an expert having to do with

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<v Speaker 1>hedge funds. Andrew Lapkin is the chief executive of Hedge

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<v Speaker 1>Mark International. And of course we are continuing our very

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<v Speaker 1>special live broadcast here It Invested sixteen The Power of

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<v Speaker 1>Big Ideas of bn Y Melan Client Conference, bort Dov

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<v Speaker 1>Mountain near Tucson, Arizona. So let's get back to New

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<v Speaker 1>York City. Bloomberg World headquarters. Katherine Puttery has a liber

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<v Speaker 1>business slash. Thank you, Kathleen. Investors are sitting on the

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<v Speaker 1>sidelines waiting to see where the Federal Reserve might move

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<v Speaker 1>interest rates next month. Stocks have been fluctuating today, investors

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<v Speaker 1>parson the data, awaiting further direction on the health of

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<v Speaker 1>the economy. Traders have boosted the probability of a rate

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<v Speaker 1>hike in June to a thirty percent chance, up from

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<v Speaker 1>four percent just a week ago. Nick Kola's chief market

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<v Speaker 1>strategist at converge X, spoke with Carol Master and Corey

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<v Speaker 1>Johnson on the Bloomberg Advantage about the markets reaction to

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<v Speaker 1>a possible FED hike. There is this push pull and

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<v Speaker 1>not in the narrative between all these FED officials about

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<v Speaker 1>when to go, how much to go, whether it's June July,

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<v Speaker 1>postprints that pre Brexit and attempts to muddy the waters

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<v Speaker 1>a little bit. And I think that's one reason why

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<v Speaker 1>the market has trouble really gauging the FETs true intentions.

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<v Speaker 1>We check the markets every fifteen minutes throughout the trading day.

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<v Speaker 1>Down Industrial average is up twelve points, less than a

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<v Speaker 1>tenth of a percent, creating at seventeen thousand, five hundred twelve,

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<v Speaker 1>SMP five founded is down one at two thousand fifty.

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<v Speaker 1>The NASTACT is up three a tenth of a percent

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<v Speaker 1>at forty seven seventy two. West Texas intermediate crude oil

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<v Speaker 1>down twenty seven cents of barrel, six tenth of a

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<v Speaker 1>percent of forty eight thirteen. Spock gold is down a

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<v Speaker 1>dollar fifty announced at twelve fifty one. Forty Tenure treasury

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<v Speaker 1>up one thirty second with the yield of one point

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<v Speaker 1>eight three percent. Among today's top business stories, Montsanto shares

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<v Speaker 1>have been up as much as seven point seven percent.

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<v Speaker 1>Mont Santo as yet to respond to their sixty two

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<v Speaker 1>billion dollar takeover offer. According to a senior US government official.

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<v Speaker 1>Montsanto's chief executive they surprised by the deal. There made

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<v Speaker 1>the offer as it seeks to become the world's biggest

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<v Speaker 1>seller of seeds and farm chemicals, tapping into growing demand

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<v Speaker 1>at a time when farmers must boost productivity to feed

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<v Speaker 1>an estimated ten billion people globally by twenty fifty. And

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<v Speaker 1>now let's get an update on some of the other

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<v Speaker 1>stories we're following today. Thank you, Catherine from the Bloomberg Newsroom.

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<v Speaker 1>I'm Alex Steele. His news update is brought to you

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<v Speaker 1>by the jeep Grand Cherokee, the most awarded suv ever.

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<v Speaker 1>at your local jew dealer today. Democratic presidential front runner

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<v Speaker 1>Hillary Clinton is campaigning in Detroit today, telling union workers

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<v Speaker 1>it is time to unify the party. We are coming

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<v Speaker 1>to the end of the Democratic primaries. I applaud Senator

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<v Speaker 1>Sanders and his supporters for challenging us. We are going

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<v Speaker 1>to get on accountable money out of politics. We are

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<v Speaker 1>gonna take on the prices of and found inequality. The

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<v Speaker 1>State Department says the US will strike terrorists when necessary.

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<v Speaker 1>That comment from Deputy spokesman Mark Toner today when he

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<v Speaker 1>was questioned about a drone hit that killed Taliban leader

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<v Speaker 1>Mullah Aktar Mohammed monsoor we will carry out strikes too,

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<v Speaker 1>Ah remove terrorists who are actively pursuing and planning and

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<v Speaker 1>directing attacks against US forces. Baltipo Mayor Stephanie Rawlings Blake

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<v Speaker 1>is asking city residents to be patient and allow the

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<v Speaker 1>entire process to come to a conclusion. After the second

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<v Speaker 1>police officer to be tried on charges in the arrest

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<v Speaker 1>of Freddie Gray was acquitted. The twenty five year old

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<v Speaker 1>died from injuries he suffered in the back of a

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<v Speaker 1>police fan. State Congressman Dan Donovan wants the U S

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<v Speaker 1>to sees frozen assets from terror related accounts and direct

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<v Speaker 1>the money to homeland security programs benefiting New York City.

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<v Speaker 1>The former prosecutor says, when an account is frozen, it

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<v Speaker 1>continues to accrue interest. Donovan's bill would send the interest

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<v Speaker 1>to the Urban Areas Security Initiative. Global News twenty four

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<v Speaker 1>hours a day, powered by our twenty journalists in more

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<v Speaker 1>than a hundred and fifty news bureaus around the world.

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<v Speaker 1>From the Bloomberg Newsroom, I'm Alex Steele, Catherine, thank you,

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<v Speaker 1>and now recapping the Dow Industrial leverage up nineteen points

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<v Speaker 1>at seventeen thousand, five hundred twenty, SMP five foundered down

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<v Speaker 1>one at two thousand, fifty one, NASTACK up five at

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<v Speaker 1>forty seven seventy four. And that's a Bloomberg business flash.

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<v Speaker 1>You're listening to Taking Stock with Kathleen Hayes and Pim

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<v Speaker 1>Fox on Bloomberg Ring. Alternative investments an increasingly important topic

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<v Speaker 1>for investors, for money managers, and certainly for the firms

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<v Speaker 1>that service these very important groups in the financial services industry.

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<v Speaker 1>Hedge funds have been hot, But are they so hot?

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<v Speaker 1>Now as many big investors pull away from using hedge

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<v Speaker 1>funds as one of those very important all investments. This

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<v Speaker 1>is a topic being discussed today here at DEB Mountain,

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<v Speaker 1>the DEB Martin Mountain, rots Carlton, about thirty miles from Tucson, Arizona,

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<v Speaker 1>at the Power of Big Ideas Invested sixteen. It's a

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<v Speaker 1>b n Y Melon client conference and a person who

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<v Speaker 1>has uh speaking on one of the panels today is

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<v Speaker 1>joining us now, and that is Andrew Lapkin, CEO of

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<v Speaker 1>Hedge Mark International, to take a look at this important question. Andrew, welcome, well,

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<v Speaker 1>thank you, it's great to be here. Kathy, So hedge funds,

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<v Speaker 1>It's interesting that people are this question is is people

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<v Speaker 1>are looking at going into hedge funds at a time

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<v Speaker 1>when we see a lot of headlines. In fact, pim

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<v Speaker 1>PIM just mentioned one investors are leaving hedge funds. In April,

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<v Speaker 1>the New York City Employee Retirement System voted to liquid

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<v Speaker 1>eight their hedge funds, and they're following Cowper's move a

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<v Speaker 1>couple of years ago. What's going on? Uh So, hedge

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<v Speaker 1>funds certainly are getting a lot of attention. In many

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<v Speaker 1>cases a little bit more of that negative you know, focus,

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<v Speaker 1>and some of that is it makes for good headlines,

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<v Speaker 1>so obviously people kind of easy to poke at. But

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<v Speaker 1>behind it all really are a few real issues, and

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<v Speaker 1>it starts with the high fees that typically hedge funds

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<v Speaker 1>have a fee structure where they're taking often two percent

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<v Speaker 1>of the assets under management plus an additional of the profits,

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<v Speaker 1>and so that works out to be you know, quite

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<v Speaker 1>lucrative for the managers. To the managers typically give up

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<v Speaker 1>almost no transparency on their portfolios, so investors really don't

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<v Speaker 1>know what they're investing in. They get very limited information.

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<v Speaker 1>And then, uh importantly, the hedge fund manager really has

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<v Speaker 1>full control, so all the trading decisions, the what they trade,

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<v Speaker 1>the markets, how much leverage, whether what instruments they use

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<v Speaker 1>as well, and then you know, finally they really control

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<v Speaker 1>even the assets, whether they go back to investors. We've

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<v Speaker 1>seen a number of funds do what's called putting up

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<v Speaker 1>their gates and so investors asked for their assets back

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<v Speaker 1>and the managers say, you know, no, And so those

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<v Speaker 1>issues are quite real and that's really what's driving a

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<v Speaker 1>lot of the headlines. You know, I keep thinking hedge funds,

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<v Speaker 1>and it's like a hedge fund for everything and every everyone. Um,

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<v Speaker 1>do you happen to know where the two and twenty

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<v Speaker 1>came from? How does someone decide that that was going

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<v Speaker 1>to be the industry standard? Yeah, I mean it dates

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<v Speaker 1>you know, way back to UH to some of their

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<v Speaker 1>you know, earliest funds and a lot of it. Really,

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<v Speaker 1>when you talk about hedge funds, it really is a

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<v Speaker 1>bad name because you're you're grouping now disparaged strategies all

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<v Speaker 1>under one category. And really the definition of hedge fund

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<v Speaker 1>is more appropriate to really say that it's a structure.

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<v Speaker 1>It's a structure that that the manager controls, and one

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<v Speaker 1>that typically pays a management fee and a performance fee.

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<v Speaker 1>And so, you know, one of the big issues is

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<v Speaker 1>to say that equity long short, that merger are distressed

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<v Speaker 1>at credit strategies are all the same, they're all bad

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<v Speaker 1>for an investor really is sort of a false, you

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<v Speaker 1>know statement in that regard and leading to part of

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<v Speaker 1>the problem why you're seeing some of the negative of

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<v Speaker 1>focus getting grouped too high. What are dedicated manager accounts. So,

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<v Speaker 1>you know, one of the things that we've seen is

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<v Speaker 1>while New York City Cowper's, a few big investors have said, hey,

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<v Speaker 1>I'm just gonna get out of the space that that

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<v Speaker 1>Often that's a little bit of a knee jerk reaction,

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<v Speaker 1>a little bit more of a how do I address

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<v Speaker 1>the political you know heat, But it doesn't hit it

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<v Speaker 1>at the issues. And so for some other big investors,

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<v Speaker 1>what they've done is they say, the problem is not

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<v Speaker 1>with the hedge fund manager. It's not that these strategies

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<v Speaker 1>don't add value to the portfolio, it's not that they're

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<v Speaker 1>they're talented stock selectors. It's that the structure is really broken.

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<v Speaker 1>And so what's evolved in the marketplace is a structure

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<v Speaker 1>called a dedicated manage account. And what that does is

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<v Speaker 1>it allows the hedge fund investor to basically have their

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<v Speaker 1>own fund. Uh. And in this case, the manager's role

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<v Speaker 1>becomes very limited. They're really just trading the portfolio. And

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<v Speaker 1>so in the dedicated manage account, it's the client who

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<v Speaker 1>now controls the assets, so they control the cash and security,

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<v Speaker 1>so the manager can't run off with the money. So

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<v Speaker 1>that's obviously a key piece. UH. It means that the

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<v Speaker 1>investor can actually negotiate a different feast ructures, so you

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<v Speaker 1>don't have to just pay the two in twenty. You

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<v Speaker 1>can actually negotiate a customer structure in some cases no

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<v Speaker 1>performance fees, in other cases multi year lookback. So you

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<v Speaker 1>get better alignment with the manager and the investor in

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<v Speaker 1>terms of that strategy. UH. And importantly the ability to

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<v Speaker 1>negotiate investment guidelines. And so now it's not just what

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<v Speaker 1>the manager does, it's the investor can have an influence

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<v Speaker 1>in terms of the strategy that's important for their overall

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<v Speaker 1>you know, portfolio, their overall pension plan. Andrew explain how

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<v Speaker 1>hedge Mark International, which is a B and y Melon affiliate,

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<v Speaker 1>how that plays into this whole conversation of risk management,

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<v Speaker 1>hedge funds and all. Really, I would say, rather than

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<v Speaker 1>just hedge funds, alternative investments, the non traditional stock bomb

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<v Speaker 1>cash sure. So you know, B and Y Melon has

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<v Speaker 1>made made a big move to really help their core

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<v Speaker 1>institutional client base address the knees around alternative investing in

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<v Speaker 1>both real estate, UH, venture capital and hedge funds. UH

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<v Speaker 1>specifically with funds. Hedge Mark was part of that strategy.

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<v Speaker 1>They acquire the company two years ago. And hedge Mark

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<v Speaker 1>is really about helping people build and operate their own private,

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<v Speaker 1>dedicated manage account platforms. So in the past investors sometimes

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<v Speaker 1>looked at manage accounts being a solution to some of

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<v Speaker 1>these issues of facing hedge fund investing. The problem is

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<v Speaker 1>that to implement it was very difficult. Pension funds would

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<v Speaker 1>have to go out and hire staff around legal and

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<v Speaker 1>structuring expertise, accounts and operation experts. And so these are

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<v Speaker 1>really areas that are the strength of being y Melon

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<v Speaker 1>and so it allows investors really to outsource UH those

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<v Speaker 1>non core aspects to someone like the bank. So it's

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<v Speaker 1>like a turn key operation exactly. So the investor can

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<v Speaker 1>still focus on picking the hedge fund, negotiating the key terms,

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<v Speaker 1>but then the operating of all of this UH is

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<v Speaker 1>done by the band. Benny Lapkin, thank you so much.

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<v Speaker 1>Thank you very much. Andrew Lapkin, Chief Executive Hedge Mark

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<v Speaker 1>International ABEAT and why Melon affiliate. You're listening to taking

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<v Speaker 1>Stock on Blueberg Radio. Some of the big topics, the

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<v Speaker 1>big questions hanging over global markets. That's coming up next

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<v Speaker 1>as we continue our live broadcasts at here at invest

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<v Speaker 1>of sixteen The Power of big Ideas of being well

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<v Speaker 1>Mell and Quiet Conference in Arizona