Phil Duff: Pensions Catalysts For Change In HF Industry

Jun 26 2008 | 6:14am ET

Big changes are coming to the hedge fund industry, according to one former honcho, and managers now have to be able to deliver a complete package that cuts across performance, advice, relationships and brand for their investors.

FrontPoint Partners founder Philip Duff told an industry conference in New York that institutions have replaced individuals as principal investors in hedge funds, and the new bosses are demanding scalability, non-correlation and “reputational exposure” from their managers.

“The hedge fund industry hasn’t changed much since the 1960s in terms of its structure and how products are bought and sold, but it’s likely to see significant changes over the next 10 to 15 years,” he said.

According to Duff, the primary drivers of change in the industry include the Financial Accounting Standards Board’s recently-unveiled proposal to require more detailed breakouts of corporate pension fund allocations. The proposal, which covers hedge funds and private equity, will force managers to manage and allocate risks in their portfolios in a more “holistic” fashion.

“Investors are looking for integrated solutions to funding their long-term liabilities as opposed to short-term fixes,” Duff said. “You have to play defense first before you can play offense to avoid the risks of having significant drawdowns.”

Other factors, such as pension funds’ recognition of the magnitude of their asset/liability gaps (88 of the top 100 public plans, and 72 of the top 100 corporate plans, are currently underfunded) and increasing regulation are also going to be significant catalysts for change.

And a hedge fund that manages $500 million to $1 billion may be interesting for individual investors, but the do “absolutely nothing” for institutional investors, making a scalable business vital to survival.

Duff advised managers to take advantage of non-correlated diversification in the financial markets, know what they own and owe in their portfolios, have independent funding in terms of securities and cash borrowing, develop a “customer acquisition” strategy, and be able to dispense advice to investors because “large investors are raising their hands for help in the current environment.”

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