Q&A: Milton Lewin, The Allocator Network
Lewin discusses the challenges facing hedge fund allocators and how they're increasingly leaning on peers for additional insight
AW: Milton, what’s the biggest challenge facing hedge fund investors these days?
ML: Without a doubt, being able to triage the overwhelming amount of information coming into their inboxes is number one. Whether it’s movies, music, hotels, or hedge funds, the key concept today is “Curation”. We all have basically infinite choices of everything; hedge fund investing is no different. And it’s definitely not just performance numbers, either – they only tell a small part of the story. What risks was the fund taking to achieve those results? How did they do in other environments? How will they do in different circumstances? Did anything change at the firm that will affect returns going forward?
The diligence process for investors is intentionally lengthy, for good reason. If it was only about the numbers, managers could just send their subscription docs with their monthly performance data. There are thousands of managers out there with a range of products – many of which can add true alpha or beneficial, risk-reducing diversification to portfolios – that are simply too voluminous for any one person or firm to analyse effectively. It’s impossible to separate or judge them based only on a monthly one-pager, or decks that all look alike and make every fund sound wonderful.
AW: What are you seeing hedge fund investors do about this?
ML: Performance data is ubiquitously available, so basic screening is pretty straightforward. Thus, investors are increasingly seeking out and sharing thoughts and insights from peers with regard to overall asset allocation and the funds that merit a closer look. Whatever the product, recommendations from people you trust always command your attention. Third-party reviews, or a fund’s historical performance can be helpful, but if someone you respect tells you that you have to see this movie or meet this manager, you’ll prioritize it.
Hedge fund allocators will ask their peers “Who have been your best performers?” or “What other funds in this category should I know about?” or “We both agree on the risks here, how did you get comfortable with them?” Prospective investors want to know all sorts of things that only someone with personal experience with that manager would know, like how responsive the manager is to questions - especially when things aren’t going well; what should they be asking in diligence meetings in addition to the obvious; what departures from the firm might be material; and so on. And before they wire their money, investors are always looking for truly objective references, as opposed to those provided by the manager, who are obviously going to say only good things.
AW: But hedge fund investors are highly diverse, with different risk appetites and investment mandates. Why would, say, an endowment benefit from sharing ideas with a family office?
ML: One thing I’ve learned – and been fascinated by – is how completely similar the needs and wants are across investor categories. Allocators all want the same things: to get truly information they can’t get elsewhere by connecting with other investors who are in the same funds they are in; finding other allocators who are diligencing the same fund they are; accessing other investors whose experience could keep them from wasting time – or worse – on the wrong funds, and so on. A conversation between smart, diverse investors will make both of them smarter, and able to apply what they learned to their specific situation and portfolio needs.
Investors all over the world can now easily access, analyse and invest in funds all over the world. Thus, there are vastly more allocators who have directly on-point knowledge, experience and insights that can be helpful to each other, regardless of their location, their category, or their investment mandate. In fact, getting cross-border or cross-investor-category perspectives can be uniquely illuminating and invaluable.
AW: What about competition? Aren’t investors always competing with each other for the best ideas?
ML: That’s another funny thing: almost every investor I spoke to said “I’m ok sharing ideas with another allocator, as long as it’s two ways, I just don’t think other investors would do that.” But everyone said that! It goes back to the fact that allocators recognize that there’s just too much information out there, and that in these markets every fund manager looks like a genius.
With the aforementioned ubiquity of data and the ease of (video and phone) access to managers, a private bank in Switzerland certainly isn’t competing with a wealth manager in South Africa or a college endowment in Texas or a family office in Israel. As one prominent allocator said to me, “A great thing about this business is that you can root for other investors to do well, and it’s not a negative for you.”
AW: Hedge Funds have had a tough time of it recently, facing pressures due to their high fees and underperformance relative to their benchmarks. What are you seeing with regard to investor perception and appetite here?
ML: There’s definitely an increase in scepticism toward hedge funds, but – and I think this is really important – I believe we’re in the middle of a transition period in the industry that most people haven’t fully recognized or appreciated. The expression "Hedge Fund" has become absurdly generic. Most people hear those words and still think "L/S Equity, chronically underperforming the index". But as an example, I last counted over 60 discrete strategies listed on The Allocator Network, and that's far from the full range that’s out there.
Sure, there are still many L/S Equity vehicles, but there are also innumerable other strategies and structures – public and private, credit and equity, highly liquid and illiquid, relative value, etc. – many of which genuinely can add value and alpha to different investors’ portfolios through true diversification, low or inverse correlations, exposure to different or specific geographies or asset categories, asymmetric return opportunities, hedging, and much more. Things like vol arb, cannabis, crypto, 47 different flavors of direct lending and specialty finance, activists with specific niches, quants, commodity traders, real estate, distressed, and on and on. And on. Some of these are hyper-focused in one geography, while others can shift their capital around the world instantly to capitalize on opportunities.
So it’s really about investors constructing the optimal portfolio for whatever their investment mandate and risk tolerance is, using the many products that are available. And how those products can be used to complement each other and enhance the portfolio’s risk-adjusted performance.
Milton Lewin is Founder of The Allocator Network
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