Hedge fund stars shy away from the limelight

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There are many things over which hedge fund traders have no control — choppy markets, retail investors plotting against them on Reddit and global pandemics to name but a few.

But it seems that having to deal with the often annoying and demanding outside investors who put money in their funds is one that, if they are rich and successful enough, they can avoid.

The recent decision by Alan Howard, the billionaire co-founder of Brevan Howard, to redeem external investors in the AH hedge fund he personally manages appears to do just that.

The fund has been highly successful. It reaped big gains from bets against Italian bonds in 2018, amid concerns that Italy would loosen ties with the EU and increase its debt pile, and again last year as market volatility soared during the early stages of the coronavirus pandemic.

After the move, Howard will continue to manage money, contributing to Brevan’s main $6.2bn Master fund and its Multi-Strategy fund. These funds allocate to a range of managers, of which Howard is just one, and are open to outside investors.

But, crucially, ejecting external investors from Howard’s own fund cuts out a lot of the extensive questions and reporting that can be required of a fund’s lead manager by exacting investors. Howard, whose fortune is estimated at £1.5bn according to the Sunday Times Rich List, has never been one for the limelight. Reducing this hassle has been one of the benefits of the move for Howard, say people familiar with his thinking.

All hedge fund managers “enjoy trading”, said one hedge fund industry insider. “No one enjoys the pain of investors asking a lot of questions.”

Brevan declined to comment.

The nuisance factor from investors has increased markedly since the financial crisis. Up until then, a fund manager’s reputation, the exclusivity of the fund and, of course, stellar performance had been key selling points to the wealthy individuals and family offices who poured money into the sector. If other reputable investors were backing a fund then that was often a good indicator that they had checked out the manager and it was probably safe to invest.

But all that changed with the discovery of Bernard Madoff’s $65bn Ponzi scheme in December 2008, in the depths of the financial crisis. Suddenly, the large institutional investors such as endowments and pension funds who were increasingly accounting for hedge funds’ investor bases wanted assurances that such a fraud could not happen again before they wrote the next large cheque.

The result has been a boom period for due-diligence practitioners and compliance staff, and the expenditure of a lot of extra time and money by hedge funds. Managers now have to sit through lengthy and rigorous operational due-diligence checks, as investors verify a fund’s trading processes, risk management frameworks, valuation methodologies, cyber security protection, disaster recovery etc etc. Some investors have specific requirements about the amount and frequency of information disclosed to them, as well as access to a fund’s lead manager. 

Institutional investors’ operational due diligence can consist of upwards of 250 questions, according to James Newman, co-head of perfORM Due Diligence Services.

“Adoption of technology has provided efficiencies in data collection, but you’re still talking about many hours of research over a six-to-10 week period typically before an institution can pull the trigger [on an investment],” he said.

The difficulty of meeting managers during the coronavirus pandemic, as well as rising cyber security threats, have only increased the level of comfort some investors need.

Breaking free of the demands of outside investors has been a large reason behind the conversion of some major hedge funds into family offices.

In late 2015, billionaire Mike Platt announced that he was converting his hedge fund firm BlueCrest into a family office. The move freed Platt, who has gone on to make big trading gains, from the tight risk limits of outside investors. And as one hedge fund investor who chose not to put money with Platt noted at the time: “Now that he is a billionaire, he doesn’t want to, or have to, deal with external investors.”

Louis Bacon’s gain of more than 70 per cent last year was helped by a newfound ability to take risk after Moore Capital returned money to outside investors.

Brevan, whose assets are rebounding after strong gains last year, remains a hedge fund firm and has insisted that it has never contemplated converting into a family office. But Howard’s decision serves as a reminder that very successful traders may eventually tire of the demands of their clients.

Investors should always be entitled to ask questions about what fund managers are doing with their money. But they may also come to realise that overzealous box-ticking just for the sake of it could eventually drive away some of the best managers.

laurence.fletcher@ft.com

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