The company that’s helping billion-dollar funds unlock lucrative investments

A few years ago, as the chief risk officer at an Asian alternative investments firm, Scott Treloar found himself in an unexpected situation.

The company, which had been managing over US$5 billion, was trying to raise capital for hedge funds. Treloar thought it would be a breeze.

Much to his surprise, no one was interested – and they failed to raise any money.

Investors said they weren’t keen on hedge funds, as those had been performing poorly for the past decade. In 2019, fund managers underperformed in the S&P 500 Index – a commonly used benchmark – for the ninth consecutive year.

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Hedge funds manage approximately US$3.2 trillion on behalf of investors, according to the 2018 Preqin Global Hedge Fund Report.

However, the investment management industry is facing several challenges: margins are thinning, and rising compliance costs due to more stringent regulations are eating into returns.

In response, hedge funds would typically cut costs and play it safe instead of reexamining their business model. An example would be prioritizing passive over active investments.

Passive investment involves a buy-and-hold mentality that doesn’t require reading the stock market’s every movement. In contrast, an active strategy is more hands-on, trying to beat the stock market through rapid buying and selling in order to take advantage of price fluctuations.

The industry is also encountering another problem: money hasn’t been flowing to the best-performing funds.

Historically, smaller hedge funds have been shown to outperform their larger counterparts.

A June 2017 report by Preqin indicated that emerging managers – first-time funds with track records of three years or less – saw annualized returns of 12.2%, compared to 7.7% for all hedge funds.

Many smaller funds specialize in certain markets or products, and often have more in-depth knowledge of those than bigger, generalist funds do.

However, institutional investors, which typically manage billions of dollars in assets, tend to invest only in large funds due to risk management mandates—a practice that persists despite the fact that these generalist funds perform more poorly than their smaller counterparts. As a result, institutions lose out on the chance to generate better returns, and smaller funds are deprived of access to a larger pool of capital.

Finding a better way

Growth and competition

The road ahead