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Speaker 1: taking stock with Kathleen's and pin Box on Bloomberg Radio.
Speaker 1: The hedge fund industry, large head funds, small hedge funds,
Speaker 1: multi strategy hedge funds, how do they all compete and
Speaker 1: how do they gain the attention of potential investors. Don Steinbruger,
Speaker 1: managing partner Agecroft Partners, joins us now. He's based in Richmond, Virginia,
Speaker 1: and you can follow him on Twitter at don Steinbruger.
Speaker 1: Don thanks very much for being here. It's great to
Speaker 1: be here, all right, So tell me about gaining the edge.
Speaker 1: This was a conference that you recently spoke at and
Speaker 1: you talked about the competition that exists in the hedge
Speaker 1: fund industry. But I gotta think this's always but this
Speaker 1: always competition for every industry. What makes this time unique, Well,
Speaker 1: you know, there's a lot of people that would like
Speaker 1: to be a hedge fund because there's all sorts of
Speaker 1: stories of hedge funds with big houses in the Hamptons
Speaker 1: and flying around private debt jets and getting invited to
Speaker 1: you know, uh, parties that have movie stars at them.
Speaker 1: But the reality is it's a very very competitive business ers.
Speaker 1: I estimate fifteen thousand hedge funds. And what makes things
Speaker 1: even worse is most of the money is going to
Speaker 1: the largest managers. Six of managers have less than a
Speaker 1: hundred million. Only five percent of assets are going to
Speaker 1: managers with less than a hundred million. So nine thousand
Speaker 1: hedge funds are competing for five percent of flows. And
Speaker 1: to make matters worse, you know, if you're a professional
Speaker 1: hedge fund investor, you use a funnel approach to select
Speaker 1: hedge funds. You're contacted by thousands a year. You meet
Speaker 1: with three to four hundred a year, you do follow
Speaker 1: up meetings with fifty, and you hire two. So if
Speaker 1: you have any flaws in your product or how you
Speaker 1: present your your your your process, you're just eliminated from competition.
Speaker 1: What about the We can certainly understand the enthusis has
Speaker 1: them in the desire, you know, so you get a
Speaker 1: little money into your bell, you start the hedge funds.
Speaker 1: But it's not just about desire. It's also about skill experience.
Speaker 1: How does that shake out right now? Since there's been
Speaker 1: such a proliferation of hedge funds and then the last
Speaker 1: couple of years, a lot of them are doing so well.
Speaker 1: So out of the fifteen thousand I think only ten
Speaker 1: to fift are worth the value that uh they charge.
Speaker 1: You know, they typically charge two and twenty, but a
Speaker 1: lot of them are now discounting fees. And in order
Speaker 1: to evaluate a hedge fund, what's important is don't just
Speaker 1: look at their performance. You know, most professional hedge fund
Speaker 1: investors use performances as screen and if you think about it,
Speaker 1: if you fall in the top ten percent performing hedge funds,
Speaker 1: you're among the top one thousand, five hundred. So professional
Speaker 1: hedge fund investors will also look at the organization to
Speaker 1: look at depth and breadth of the investment team. You know,
Speaker 1: what is ther bios, what's their work experience, the look
Speaker 1: at the investment process and try to identify what inefficiency
Speaker 1: in the market this hedge funds going after what their
Speaker 1: differential with vantages to capture that inefficiency. Risk controls are
Speaker 1: really important. Obviously, performance is important. Service providers, you know,
Speaker 1: who's auditing the fund, who's their lawyer. All of those
Speaker 1: things are important, and to get hired, you gotta rank
Speaker 1: well across each of those. If you have a weakness,
Speaker 1: you're just gonna get eliminated from competition. But if you're
Speaker 1: already in the business, then you kind of know all this,
Speaker 1: don't you. I mean, you know who the standard or
Speaker 1: the accepted legal advisor is, who the accountants are, what
Speaker 1: are some of the answers. Where do we go for
Speaker 1: answers if you're trying to evaluate where to invest your
Speaker 1: money using these vehicles, these these funds. Well, first of all,
Speaker 1: there's a lot of hedge funds that don't know how
Speaker 1: people evaluate them. Um. But you know, if if you're
Speaker 1: evaluating the hedge fund, uh, there's a lot of consultants
Speaker 1: that can help you. You really shouldn't allocate to a
Speaker 1: hedge fund and unless you completely understand what their investment
Speaker 1: processes and what their edges, and you should take those
Speaker 1: things I just told you and create a spreadsheet and
Speaker 1: make sure that you ask the questions and evaluate in
Speaker 1: each in each of those metrics. And if you aren't
Speaker 1: able to do that, rely on someone who can who
Speaker 1: can help you pick hedge funds. But is anybody worth
Speaker 1: the the what is it two percentage points? That? I
Speaker 1: mean the hedge funds came in at the top of
Speaker 1: their cycle, right, and they've charged really big fees. That
Speaker 1: means they have to really outperform for people to do
Speaker 1: more than break even at this point in time. Done,
Speaker 1: do you think it would be incumbent on most of
Speaker 1: them to to pare that down a bit make them
Speaker 1: more affordable in their form, more in line with realistic expectations. Well,
Speaker 1: first of all, I said, I thought ten to fiftcent
Speaker 1: of hedge funds added value above the fees they charge.
Speaker 1: If I look at the mutual fund industry, I think
Speaker 1: it's a lower percent. I think maybe five percent of
Speaker 1: mutual funds are actually worth the fees they charge. Now,
Speaker 1: hedge funds do charge a higher fee, which means a
Speaker 1: better generate higher return to generate higher net return of expenses.
Speaker 1: But you know that there are certain strategies you just
Speaker 1: can't replicate with E T f s or index funds.
Speaker 1: So a hedge fund is a structure, it is not
Speaker 1: a strategy. Within the hedge fund industry, there are a
Speaker 1: lot of different strategies that add diversification for to a portfolio.
Speaker 1: You know, one strategy that's uh in demand right now
Speaker 1: is direct lending. You know, you have all these banks
Speaker 1: that have stopped lending too small and midsized companies. So
Speaker 1: the yields you can get on direct loans or you know,
Speaker 1: high single digits, which is well above marketable fixed income securities.
Speaker 1: You know, another strategy that's kind of interesting is UM
Speaker 1: UH C tas or commodity trading advisors that focus on trends.
Speaker 1: Why are they interesting because when the market sells off,
Speaker 1: you know, go back to two thousand and eight. You know,
Speaker 1: if you're a pension fund and you had all your
Speaker 1: money in UH with various equity managers, both in the
Speaker 1: US overseas emerging market, you had bond managers. When the
Speaker 1: markets sold off, correlations between all those managers went up
Speaker 1: and they lost a lot of money. So are looking
Speaker 1: for strategies that will help diversify C t A s
Speaker 1: do that matter of factor correlation? If they're trend following
Speaker 1: tends to be moving the opposite direction, they tend to
Speaker 1: get negatively correlated if you have a long UH prolonged
Speaker 1: sell off in the marketplace. Reinsurance is an interesting strategy
Speaker 1: UM basically focusing on catastrophe. These are funds that basically
Speaker 1: are collecting premiums. And let's say they're collecting fourteen to
Speaker 1: sixteen percent premium and they subtract out their payments. They're
Speaker 1: typically focusing on a seven to eight percent return. Don't
Speaker 1: steinberga thank you so very much for taking time out
Speaker 1: for us today. Managing partner at Agecroft Partners saying better
Speaker 1: choose carefully, Not at all hedge funds are worth the fees.
Speaker 1: This is taking stock on Bloomberg Radio. Coming up Bloomberg
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