Hedge funds remain a valid part of institutional investment portfolios, but they must also adjust their structures, be more transparent about fees and be more creative around the products they offer, according to a report by Willis Towers Watson.
The report, called ‘Hedge funds: a new way’ notes that hedge funds have witnessed a growing tide of negative sentiment directed at them, driven by a lengthy period of lacklustre returns coupled with hefty fees. But the report suggests that the sector can recover from this if certain changes are made.
“We believe hedge funds continue to have competitive advantages relative to larger institutional asset managers, which result from their largely unconstrained investment mandate,” the report says. “They can be more dynamic, hire the brightest investment talent and should be less influenced by underlying market returns. Consequently, a hedge fund portfolio can generate strong performance and complement a total portfolio.”
The consultancy firm suggested it has designed a new metric for how hedge funds operate, which “combats the structural headwinds facing the industry by isolating specialist skill, designing appropriate solutions to fit in with the wider portfolio and negotiating value for money”.
The report says: “We believe that this new way allows hedge fund portfolios to deliver attractive returns, improve portfolio balance and ultimately justify their inclusion in our clients’ portfolios.”
It notes that it has always avoided viewing hedge funds in isolation, but rather as part of a portfolio, designed to complement and to augment. “This philosophy has driven the superior downside protection we believe is so important,” it suggests.
The report adds: “Evolving to the new way, to thrive going forward, has been far from a trivial exercise. It has required us to draw on our wider resources. We have leveraged our clients’ collective scale, new infrastructure and our culture of innovation to help identify, design and launch specialist hedge fund solutions underpinned by a desire to change the investment industry for the benefit of the end saver. We believe we have created a new and different way and hope disillusioned asset owners will evaluate hedge funds through this alternative lens.”
Willis Towers Watson, Hedge fund, Cayman Island,