Advisers' next chore might be to clip the hedges

OCT 28, 2012
To hedge or not to hedge? That was the question in Chicago last week at the InvestmentNews Alternative Investments Conference. Facing off were two noted investors. Arguing the case against hedge funds was Simon Lack, principal and founder of SL Advisors LLC. Defending hedge funds and alternative investments was Ed Butow-sky, managing partner of Chapwood Capital Investment Management LLC. Size affects hedge fund returns negatively, Mr. Lack said. “Better returns are associated with a smaller industry,” he said. The internal rate of return for hedge funds since 1998 has been half as good as the return of Treasury bills, Mr. Lack said. “In the 1990s, hedge funds did really well, but as investors have come into hedge funds, returns have come down,” he said. “Smaller is better for hedge funds,” Mr. Lack said, noting that the hedge fund industry controls $2 trillion in client assets. “Today, the hedge fund industry is overcapitalized. There are some good hedge funds, but the aggregate return has been poor,” Mr. Lack said. “This has been a fairly major flawed analysis by the institutional investing industry,” he said. The standard hedge fund fee structure, in which the manager charges 2% of assets and also captures 20% of the return, continues to be controversial. “Everyone knows that is egregious,” said Mr. Lack, who recently wrote a book on hedge funds. “Today's hedge fund investors may think 7% [annual] return is a reasonable expectation, but that means every year would be a record year for the industry,” he said, adding that clients should have a very small allocation — 1% to 2% — to hedge funds in their portfolios. “I'd have a lot more than that,” Mr. Butowsky countered. He recommends a hedge fund allocation in client portfolios of 25%. Mr. Butowsky said that Mr. Lack's “information doesn't support reality. “We're talking about performance but really need to ask: What is the purpose or benefits of having hedge funds in the portfolio?” “The reason we include hedge funds in the portfolio is to reduce the risk in clients' portfolios,” Mr. Butowsky said. “There are 14,000 hedge funds in the U.S., but only 250 are institutional-quality hedge funds,” he said. “Our goal is to make portfolios efficient and get rid of waste.” Mr. Butowsky said that his hedge fund portfolio performed “miserably” last year, but he isn't going to dump the investments. “We have to be talking about the benefits of including this in the portfolio, not as a stand-alone,” he said. “As advisers, our goal is to help manage risk, and we have to add alternatives to the portfolio.” [email protected] Twitter: @bdnewsguy

Latest News

WallStreetBets takes on the SEC — and makes a surprisingly sharp case
WallStreetBets takes on the SEC — and makes a surprisingly sharp case

The Reddit trading community's formal comment letter against the proposal is drawing widespread attention across finance and tech circles.

Stratos Wealth Holdings closes 11 acquisitions in push for advisory scale
Stratos Wealth Holdings closes 11 acquisitions in push for advisory scale

RIA aggregator adds $4.8 billion in client assets across seven states as demand grows for alternatives to traditional succession models.

Beyond wealth management: Why the future of advice is becoming more human
Beyond wealth management: Why the future of advice is becoming more human

As technical expertise becomes increasingly commoditized, advisors who can integrate strategy, relationships, and specialized expertise into a cohesive client experience will define the next era of wealth management

Shareholder sues FS KKR Capital board, alleges NAV and dividend cover-up
Shareholder sues FS KKR Capital board, alleges NAV and dividend cover-up

Shareholder targets FS KKR Capital's directors over alleged portfolio valuation and dividend missteps.

UBS loses $1.2 million arbitration claim linked to variable annuities and margin
UBS loses $1.2 million arbitration claim linked to variable annuities and margin

UBS has a history of costly litigation stemming from the sale of volatile investment products.

SPONSORED Beyond wealth management: Why the future of advice is becoming more human

As technical expertise becomes increasingly commoditized, advisors who can integrate strategy, relationships, and specialized expertise into a cohesive client experience will define the next era of wealth management

SPONSORED Durability over scale: What actually defines a great advisory firm

Growth may get the headlines, but in my experience, longevity is earned through structure, culture, and discipline