MONACO (Reuters) - Hedge fund investors are turning cautious on huge, multi-billion dollar funds, say executives meeting in Monaco this week, and see better returns from the boutique funds that were once the driving force of the industry.
Executives at the GAIM conference in Monaco said some super-sized global macro and managed futures funds could find it harder to trade positions, while some investors said they had grown wary or taken money out of funds that had grown too big.
“The feeling we have is that they (big commodity trading advisers and macro funds) all feel a bit too big compared to the real liquidity of the markets,” said Patrick Fenal, deputy chairman of asset manager Unigestion in an interview on the sidelines of the conference.
“Correlation doesn’t help. Everything today is correlated. Growth in China, commodities, forex — that’s clearly a very bad environment for them.”
Global macro funds trade bonds, interest rates, currencies and commodities, while managed futures funds are computer-driven portfolios that latch onto market trends.
So-called “two traders with a terminal” epitomized the rapid growth of the industry in the early years of the last decade, as bank prop traders setting up on their own profited from a long bear market in technology stocks and subsequent market rally.
But investors deserted small funds during the crisis, and when they returned to the industry often opted for big funds, believing they were more likely to survive and could protect clients better from fraudsters such as Bernard Madoff.
Inflows coupled with strong performance helped funds such as Brevan Howard’s Master fund grow to around $25 billion, while Winton Capital, which runs computer-driven funds, has around $17 billion and Moore Capital manages around $15 billion.
However, investors are starting to see size as a potential danger again.
One investor who asked not to be named told Reuters they had cut their holding in a boutique hedge fund because it had grown too big.
“We had $100 million in one fund (and) it (the fund) is now over $500 million. We think that in the case of this particular strategy it’s too big and we’ve seen style drift.”
With hedge funds down 2.7 percent so far this year, according to Hedge Fund Research’s HFRX index, after a tricky May and June, investors are hungry for managers who can find attractive trades uncorrelated to wider market moves.
A smaller fund can, according to Better Capital chairman Jon Moulton, “snipe at really attractive opportunities” rather than “invest great wodges of money.” In contrast, one investor pointed out that a 1 percent position for a $10 billion fund is $100 million.
Christophe Vogt, global head of hedge funds at Allstate Investments, said he had seen better returns and lower volatility from smaller managers, and said larger funds could end up being more exposed to market movements.
“Large funds may struggle to deliver higher quality returns — they’re sometimes forced to risk premia that hedge funds aren’t meant to take, such as beta. It may be harder for them to find idiosyncratic opportunities,” he said in an interview.
“We’re watching some managers who are growing in size. If a manager for instance grows quickly from $1 billion to $5 billion and starts struggling, those are conditions for a yellow flag.”
Hugh Hendry, founder of Eclectica Asset Management, said: “If the manager is managing more than $2 billion you start raising questions.”
Editing by Mike Nesbit