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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
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9
establish their own hedge fund organizations. In most
of these arrangements, the portfolio manager would
continue to run their publicly offered long-only funds
alongside their private hedge fund products.
The impact of these actions on the investment product
landscape is illustrated in Chart 2.
Efforts from traditional asset managers to protect
their allocations by offering investors an extended
set of products that employed more “alternative”
techniques to realize returns had mixed results.
The 130/30 fund structures performed poorly in the
August 2007 “Quant Quake” that shook the markets
in a precursor to the GFC. Long-only managers
employing the structures had little experience
running a short book and this led to excessive losses
when investors sought to redeem allocations. Similar
problems affected many of the traditional portfolio
managers that chose to launch hedge funds in the pre-
GFC years. Investors sought to replace such managers
with more experienced hedge fund managers.
On the other hand, the foothold that traditional asset
managers created in the alternative UCITS space was
quite successful. By 2007, according to SEI/Strategic
Insights, alternative UCITS AUM had reached $212
billion—almost all of which was being run by traditional
asset managers.
Hedge Fund Responses to the GFC Create
First Convergence Zone
Convulsions that occurred in the GFC and pressures
from institutions that emerged as the predominant
category of hedge fund investors in the post-GFC
era began to significantly change the investment
landscape by 2009-2010.
Pressure was put on hedge fund managers to create
a better alignment between the liquidity of their
underlying investment products and the terms that
they were offering on their funds. There was also
a move toward demanding more transparency in
hedge fund portfolios, either through expanded
reporting on co-mingled fund holdings or through
the establishment of “funds of one” and separately
managed accounts.
There was also a move by many European hedge fund
managers to launch alternative UCITS products. This
related to the backlash against fund of hedge funds
that occurred post-Madoff and to the demand from
insurance companies and other institutions for a more
transparent and liquid trading product. Although
alternative UCITS AUM fell 55% in 2008 from $212
billion to only $117 billion, the market had recovered
fully by 2010.
C
o
n
v
e
r
g
en
c
e
Liquidity
High
High
Transparency
Low
Low
Passive Index
& ETF Funds
Unconstrained
Long
UCITs &
Regulated
Alternative
Funds
Liquid Equity & Credit
Hedge Strategies
Macro
Distressed
Illiquid Equity & Credit
Hedge Strategies
T
ra
d
i
t
i
o
nal As
s
e
t
Manag
e
r
s
Long
Only
He
d
g
e Fu
nds
Chart 3: Investment Structures in the Public Markets: 2010
Source: Citi Investor Services