By Peter Douglas, GFIA
We recently were asked to source a shortlist of established, differentiated, Asian boutique hedge funds, for a distribution company. The deal between the distribution company and the funds, if concluded, would be that the distribution company would make introductions to European institutions, in return for a fee share.
We anticipated that creating the shortlist, based on our assessment of the managers we know, and their strategies, would be straightforward. However, we would need to check with each manager that they wanted to be on that shortlist, and that they were in principle happy with the proposed arrangement.
If we had been conducting this work a few years ago, our experience would likely have been that, while all managers were keen to win institutional tickets from outside Asia, many would have baulked at paying a distribution fee. A good investment principal or team, doing the right job in an appropriated resourced organisation, would have been confident
that eventually the big tickets would come, and would be careful to protect their remaining capacity from lower margin business.
Today, the reaction is different. Virtually all managers are perfectly happy to pay a distribution fee. While the number on the packet remains “2&20”, the actual blended fee that managers are seeing, after seeding deals, separate accounts, distribution deals, etc, has been falling steadily. So the prospect of a ticket coming in at, say, 80% of the headline
fee, is no longer scary or unusual. The only managers that baulked at a fee-share were the long-only stockpickers, who are, generally, seeing their assets rise steadily anyway and are acutely aware of how much capacity they have left to “sell”.
However the prospect of European money coming in created a very different reaction. AIFMD is a real bogeyman, that, it appears, still has most managers confused. A couple of managers fl atly refused to consider accepting money from a European investor. Most were hesitant, and a couple wanted, in effect, a warranty from the distributor that the
offering would be compliant (a warranty that I doubt will be forthcoming giving that AIFMD’s requirements appear to be integral to the structure of the fund and its management).
Managers are already confused about the extent to which the reporting requirements of FATCA impact their ability to consider accepting US investors. Many US investors have always been leery of investing directly in offshore funds, seeing PFIC accounting as helpful but not the answer to all their problems. A manager can of course create a master-feeder structure, and plenty do, but for a smaller fund it’s a signifi cant layer of cost.
We’re already beginning to see the very real constraints imposed by the global move to more restrictive regulation. Smaller hedge funds used to be able to grow freely if their performance and investment proposition were attractive enough, and attract capital from investors globally. This is decreasingly feasible. Attracting global capital now also requires an expensive new layer of compliance, accounting, and structuring, which mandates a larger and less flexible organisational structure.
The world continues to become less and less conducive to success driven by solely by investment excellence, and is bifurcating between large asset gathering managers, and small skill-driven boutiques, with a deeper and deeper divide between them. Our recent exercise demonstrated clearly that even if managers have an excellent investment
proposition, and are prepared to accept lower fees to take good quality tickets, they may still be unable to grow, constrained by a politically driven regulatory environment.