Hedge funds are having a tough year. Redemptions in July were the highest since the depths of the financial crisis, and annual flows are poised to be negative for only the third time ever. The other two years were 2008 and 2009.
The hedge fund industry has struggled to define its value proposition as an asset class in the post-financial crisis world. Despite doubling down on risk management, becoming a registered investment vehicle and increasing regulatory and investor disclosures, the industry, in general, has not managed to reshape its public image. Instead, it’s shuffled from one public relations crisis to the next, remaining relatively quiet throughout, despite having been given the ability by regulators, via the JOBS Act, to communicate more openly with the investing public.
In the last eight years, the hedge funds have been plagued by persistent headlines about insufficient returns and outsized fees. They were seen as one of the original villains in the immediate fallout of the financial crisis, a few bad actors were caught trading on insider information, and some managers shut their fund to outside money. Perhaps, it was speculated, to avoid regulatory scrutiny.
And still, there’s been no formal campaign to change the industry’s image.
Most recently, some of the biggest hedge funds in the market have begun dropping their management fees to stave off the wave of investor redemptions. The irony here is that with economists speculating that markets are near the end of their bull run and predicting a correction in the coming quarters, now is the worst time to pull out of a truly hedged strategy. In fact, hedge fund investments should be in higher demand going into 2017.
But no one is saying that, at least not publicly. What we hear instead is that there are too many funds in the market right now and too little talent to manage them. While perhaps true, that story line doesn’t inspire confidence, it creates more uncertainty. And all hedge funds are getting painted with that same broad brush.
The truth is hedge funds weren’t designed to thrive in a bull market. They aren’t supposed to win big when markets are heading in one direction—up, up, up—as ours have been for the last eight years. Long-only funds are for that. Hedge funds are supposed to provide downside protection. They are built to deliver measured growth in choppy markets and minimize losses when markets tank.
So how do you change the narrative?
By being proactive. By telling the story of how much the industry has grown up. By educating investors on how hedged strategies can protect them in the event of a correction in 2017. By explaining to investors that investment risk is better managed today and the asset class is more transparent than it has ever been. In fact, in some ways, hedge funds are more transparent now than mutual funds. But that’s not widely known to investors.
Eliminating or reducing management fees is probably a move that was long overdue, but the narrative has already been hijacked by voices who are positioning it as a defensive move. For hedge fund managers who have lowered or eliminated their fees, why not come out and say that the move was made to more closely align your interests with your investors?
Why has there been no breakaway hedge fund or group of funds to take on the role of changing the industry’s image and repositioning it for the next 10 years? With the latest headlines warning of a mass exodus of investment dollars, now is the time to speak up.
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