Manufacturers pin hopes on high alpha

The shift in asset allocation from plain vanilla equity to leveraged investments continues unabated. Hedge funds, private equity, property and other high alpha alternatives have captured the imagination of business development executives in fund houses across Europe and beyond.

The main reason for the popularity of hedge funds among the fund marketers is a new stream of fee income. For high alpha also reads high cost to investors, with manufacturers rewarded a percentage of any profits a fund makes.

Schroders, which has re-invented itself as a pan-European funds house working with a select coterie of Continental distribution partners, calculates that passively managed assets contribute just 10 basis points maximum to the balance sheet of a typical institution.

But hedge funds, quants, high alpha equity and absolute return funds can contribute anything up to 300 basis points. For a company with only a small amount in alternatives, say E10bn, this can mean E300m in extra profits each year.

The business plans of Europe’s leading fund managers now expect equities to return only single figures in the medium to long term. But charges of up to 200 basis points for actively managed retail funds, plus fees paid to trading platforms mean private clients are beginning to turn to cash, structured products and high alpha alternatives.

There is still no consensus about whether hedge funds should be treated as a separate asset class. It may not make much difference to investors, but to the manufacturers, these types of decisions can have a huge impact on company structures, remuneration and relationships with distributors.

Credit Suisse First Boston (CSFB), for instance, has set up a separate alternatives unit to run alongside CSAM, its asset management arm. CSFB’s new chief, Brady Dougan, who has taken over from John Mack, is apparently a big fan of alternatives. He sees them as absolutely crucial to the future of the business.

He has called for CSAM and the new unit, the Alternative Capital Division, to co-operate on joint product marketing missions to insurance companies and banks. They have also been asked to amalgamate back-office operations, where necessary, to save on costs.

Gartmore has gone one step further. It has integrated hedge funds into its mainstream, and named Charles Beazley as head of its combined institutional and alternatives business.

Barclays Global Investors’ head of intermediated products John Demaine commented: “I am struggling to see why we would build an index for hedge funds, as it is not a separate asset class.”

Yuri Bender - Editor-in-chief