WEBVTT - Agecroft's Steinbrugge on Finding Worthwhile Hedge Funds(Audio)

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<v Speaker 1>Charlie Pelton. That's a Bloomberg Business flash. You're listening to

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<v Speaker 1>taking stock with Kathleen's and pin Box on Bloomberg Radio.

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<v Speaker 1>The hedge fund industry, large head funds, small hedge funds,

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<v Speaker 1>multi strategy hedge funds, how do they all compete and

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<v Speaker 1>how do they gain the attention of potential investors. Don Steinbruger,

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<v Speaker 1>managing partner Agecroft Partners, joins us now. He's based in Richmond, Virginia,

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<v Speaker 1>and you can follow him on Twitter at don Steinbruger.

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<v Speaker 1>Don thanks very much for being here. It's great to

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<v Speaker 1>be here, all right, So tell me about gaining the edge.

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<v Speaker 1>This was a conference that you recently spoke at and

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<v Speaker 1>you talked about the competition that exists in the hedge

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<v Speaker 1>fund industry. But I gotta think this's always but this

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<v Speaker 1>always competition for every industry. What makes this time unique, Well,

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<v Speaker 1>you know, there's a lot of people that would like

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<v Speaker 1>to be a hedge fund because there's all sorts of

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<v Speaker 1>stories of hedge funds with big houses in the Hamptons

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<v Speaker 1>and flying around private debt jets and getting invited to

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<v Speaker 1>you know, uh, parties that have movie stars at them.

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<v Speaker 1>But the reality is it's a very very competitive business ers.

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<v Speaker 1>I estimate fifteen thousand hedge funds. And what makes things

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<v Speaker 1>even worse is most of the money is going to

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<v Speaker 1>the largest managers. Six of managers have less than a

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<v Speaker 1>hundred million. Only five percent of assets are going to

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<v Speaker 1>managers with less than a hundred million. So nine thousand

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<v Speaker 1>hedge funds are competing for five percent of flows. And

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<v Speaker 1>to make matters worse, you know, if you're a professional

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<v Speaker 1>hedge fund investor, you use a funnel approach to select

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<v Speaker 1>hedge funds. You're contacted by thousands a year. You meet

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<v Speaker 1>with three to four hundred a year, you do follow

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<v Speaker 1>up meetings with fifty, and you hire two. So if

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<v Speaker 1>you have any flaws in your product or how you

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<v Speaker 1>present your your your your process, you're just eliminated from competition.

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<v Speaker 1>What about the We can certainly understand the enthusis has

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<v Speaker 1>them in the desire, you know, so you get a

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<v Speaker 1>little money into your bell, you start the hedge funds.

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<v Speaker 1>But it's not just about desire. It's also about skill experience.

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<v Speaker 1>How does that shake out right now? Since there's been

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<v Speaker 1>such a proliferation of hedge funds and then the last

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<v Speaker 1>couple of years, a lot of them are doing so well.

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<v Speaker 1>So out of the fifteen thousand I think only ten

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<v Speaker 1>to fift are worth the value that uh they charge.

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<v Speaker 1>You know, they typically charge two and twenty, but a

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<v Speaker 1>lot of them are now discounting fees. And in order

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<v Speaker 1>to evaluate a hedge fund, what's important is don't just

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<v Speaker 1>look at their performance. You know, most professional hedge fund

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<v Speaker 1>investors use performances as screen and if you think about it,

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<v Speaker 1>if you fall in the top ten percent performing hedge funds,

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<v Speaker 1>you're among the top one thousand, five hundred. So professional

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<v Speaker 1>hedge fund investors will also look at the organization to

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<v Speaker 1>look at depth and breadth of the investment team. You know,

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<v Speaker 1>what is ther bios, what's their work experience, the look

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<v Speaker 1>at the investment process and try to identify what inefficiency

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<v Speaker 1>in the market this hedge funds going after what their

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<v Speaker 1>differential with vantages to capture that inefficiency. Risk controls are

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<v Speaker 1>really important. Obviously, performance is important. Service providers, you know,

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<v Speaker 1>who's auditing the fund, who's their lawyer. All of those

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<v Speaker 1>things are important, and to get hired, you gotta rank

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<v Speaker 1>well across each of those. If you have a weakness,

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<v Speaker 1>you're just gonna get eliminated from competition. But if you're

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<v Speaker 1>already in the business, then you kind of know all this,

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<v Speaker 1>don't you. I mean, you know who the standard or

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<v Speaker 1>the accepted legal advisor is, who the accountants are, what

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<v Speaker 1>are some of the answers. Where do we go for

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<v Speaker 1>answers if you're trying to evaluate where to invest your

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<v Speaker 1>money using these vehicles, these these funds. Well, first of all,

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<v Speaker 1>there's a lot of hedge funds that don't know how

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<v Speaker 1>people evaluate them. Um. But you know, if if you're

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<v Speaker 1>evaluating the hedge fund, uh, there's a lot of consultants

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<v Speaker 1>that can help you. You really shouldn't allocate to a

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<v Speaker 1>hedge fund and unless you completely understand what their investment

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<v Speaker 1>processes and what their edges, and you should take those

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<v Speaker 1>things I just told you and create a spreadsheet and

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<v Speaker 1>make sure that you ask the questions and evaluate in

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<v Speaker 1>each in each of those metrics. And if you aren't

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<v Speaker 1>able to do that, rely on someone who can who

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<v Speaker 1>can help you pick hedge funds. But is anybody worth

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<v Speaker 1>the the what is it two percentage points? That? I

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<v Speaker 1>mean the hedge funds came in at the top of

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<v Speaker 1>their cycle, right, and they've charged really big fees. That

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<v Speaker 1>means they have to really outperform for people to do

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<v Speaker 1>more than break even at this point in time. Done,

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<v Speaker 1>do you think it would be incumbent on most of

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<v Speaker 1>them to to pare that down a bit make them

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<v Speaker 1>more affordable in their form, more in line with realistic expectations. Well,

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<v Speaker 1>first of all, I said, I thought ten to fiftcent

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<v Speaker 1>of hedge funds added value above the fees they charge.

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<v Speaker 1>If I look at the mutual fund industry, I think

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<v Speaker 1>it's a lower percent. I think maybe five percent of

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<v Speaker 1>mutual funds are actually worth the fees they charge. Now,

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<v Speaker 1>hedge funds do charge a higher fee, which means a

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<v Speaker 1>better generate higher return to generate higher net return of expenses.

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<v Speaker 1>But you know that there are certain strategies you just

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<v Speaker 1>can't replicate with E T f s or index funds.

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<v Speaker 1>So a hedge fund is a structure, it is not

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<v Speaker 1>a strategy. Within the hedge fund industry, there are a

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<v Speaker 1>lot of different strategies that add diversification for to a portfolio.

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<v Speaker 1>You know, one strategy that's uh in demand right now

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<v Speaker 1>is direct lending. You know, you have all these banks

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<v Speaker 1>that have stopped lending too small and midsized companies. So

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<v Speaker 1>the yields you can get on direct loans or you know,

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<v Speaker 1>high single digits, which is well above marketable fixed income securities.

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<v Speaker 1>You know, another strategy that's kind of interesting is UM

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<v Speaker 1>UH C tas or commodity trading advisors that focus on trends.

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<v Speaker 1>Why are they interesting because when the market sells off,

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<v Speaker 1>you know, go back to two thousand and eight. You know,

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<v Speaker 1>if you're a pension fund and you had all your

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<v Speaker 1>money in UH with various equity managers, both in the

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<v Speaker 1>US overseas emerging market, you had bond managers. When the

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<v Speaker 1>markets sold off, correlations between all those managers went up

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<v Speaker 1>and they lost a lot of money. So are looking

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<v Speaker 1>for strategies that will help diversify C t A s

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<v Speaker 1>do that matter of factor correlation? If they're trend following

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<v Speaker 1>tends to be moving the opposite direction, they tend to

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<v Speaker 1>get negatively correlated if you have a long UH prolonged

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<v Speaker 1>sell off in the marketplace. Reinsurance is an interesting strategy

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<v Speaker 1>UM basically focusing on catastrophe. These are funds that basically

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<v Speaker 1>are collecting premiums. And let's say they're collecting fourteen to

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<v Speaker 1>sixteen percent premium and they subtract out their payments. They're

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<v Speaker 1>typically focusing on a seven to eight percent return. Don't

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<v Speaker 1>steinberga thank you so very much for taking time out

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<v Speaker 1>for us today. Managing partner at Agecroft Partners saying better

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<v Speaker 1>choose carefully, Not at all hedge funds are worth the fees.

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<v Speaker 1>This is taking stock on Bloomberg Radio. Coming up Bloomberg

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