Retail investors’ obsession with liquidity and low fees, combined with an insatiable appetite for yield, has pushed many dangerously into managed futures, according to Dominic McCormick, chief investment officer at Select Asset Management.
McCormick, whose company has a retail distribution arrangement with global alternatives manager Neuberger Berman in Australia, said demand for daily liquidity, full disclosure, value for cost and global scope had seen retail money flow to managed futures, a strategy which he said often “performed poorly in difficult markets”.
“There’s a perception that managed futures are simple, but they’re not. They can be complex and opaque, with a high level of gearing,” he said.
“They do offer diversification and daily liquidity, but investors have very little idea how people are making money and may not be able to sleep well at night.”
However, investors who want exposure to alternatives now have options beyond managed futures and hedge funds of funds.
Furthermore, traditional fee structures, which charged a base management fee of 2 per cent plus a 20-per-cent performance fee, were obsolete, with many new hedge funds charging less than 1 per cent.
McCormick said the rapid growth of hedge funds of funds from the mid-1990s through to the mid-2000s was supported by strong returns, which were lowly correlated to equities during the tech wreck. However, he said the sector grew too fast and got too big in a short period of time by attracting “fickle money that wasn’t going to stick around”.
Hedge funds and alternatives are valid, valuable investments but they needed to address structural issues such as cost, liquidity and transparency before investors would look at them again." Fred Ingham
“We quickly developed the view that hedge funds of funds as a standalone retail product were not a viable long-term option,” he said.
Fred Ingham, a managing director at Neuberger Berman, said interest in alternative investments was returning as funds managers started addressing structural issues around cost, liquidity and transparency, while low bond yields and volatile equity markets were forcing investors to reconsider alternatives.
“Hedge funds and alternatives are valid, valuable investments but they needed to address structural issues such as cost, liquidity and transparency before investors would look at them again,” he said.
Ingham’s views are supported by a soon-to-be-released State Street report, which finds that investor demands for greater transparency, more favourable fees and greater liquidity will be three of the top-five drivers of change to the alternative investment industry over the next five years.
According to The next alternative: Thriving in a new fund environment, alternative managers must deliver operational and performance excellence, while balancing investors’ needs in order to see the “mainstreaming” of alternatives.
Andrew Fairweather, managing director of third-party distributor, Winston Capital Partners, said the alternative investment market was growing seven times faster than traditional asset classes, with some institutional investors increasing their allocation to more than 25 per cent.
He urged financial advisers to partner wisely with funds managers that had a global reach, scale and resources to capture opportunities in the alternatives market.
TOPICS: a managing director at Neuberger Berman, Andrew Fairweather, chief investment officer at Select Asset Management, daily liquidity, Dominic McCormick, financial advisers, full disclosure, global alternatives manager Neuberger Berman, global scopeFred Ingham, insatiable appetite for yield, liquidity and low fees, Managed Futures, managing director of third-party distributor Winston Capital Partners, Neuberger Berman, retail distribution arrangement, value for cost