Profit-starved hedge fund managers, best known as masters of the financial universe, are turning to an unlikely place for their next windfall: the unglamorous world of long-only asset management.
Amid volatile markets, constraints on the capacity of their main trading strategies and an ever more conservative investor base, some of the industry’s biggest names are focusing on raising money for pared-back versions of their main portfolios, eschewing leverage and short selling in pursuit of assets and stability.
Hedge fund managers see big opportunities in bringing their skills – and the higher fees they charge – to an increasingly passive long-only investment world.
“There is a trend now to grow [long-only funds run by hedge funds] quite aggressively, the main attractions are that you diversify your fee base and expand your investor universe,” said Daniel Caplan, European head of global prime finance at Deutsche Bank. “In addition, you may not face the same capacity constraints that you do with a hedge fund product.”
While several firms have run long-only products for the past few years, serious interest is only now beginning to be taken by large institutional clients such as pension funds.
Hedge fund firms with growing long-only businesses include Winton Capital Management, Lansdowne Partners, Egerton, Odey, Renaissance Technologies, CQS, Citadel, Two Sigma and GLG Partners – all leading names in the industry.
“We’re starting to have a lot of conversations with people in the pension fund world about hedge fund managers being used in traditional equity allocations,” says Peter Harrison, chief executive of the $5bn London-based hedge fund RWC Partners.
Last Tuesday, RWC acquired three long-only activist funds from pension fund giant Hermes. The deal means that half of RWC’s assets are now in traditional long-only strategies.
For GLG, a division of Man Group, the world’s second-largest hedge fund firm, its long-only funds were the only ones that saw assets grow in the first half of the year, rising to $11.3bn.
“Most hedge funds launching long-only strategies have targeted funds of $500m-$1bn, but are really looking to expand that further,” said Mr Caplan.“It’s definitely the right time to be doing it.”
For many, opening long-only funds makes good sense and takes little effort: managers already have teams generating long investment ideas for their hedge funds and the infrastructure to manage large client bases.
But there are challenges. Hedge funds’ abilities to raise money for new long-only products have hitherto been stymied by high charges that traditional long-only investors are unwilling to pay.
Typical hedge fund-run long-only funds charge fees of between 1 and 1.5 per cent annually and sometimes performance-related fees as well.