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Politicians know it’s not just the message that’s important; the way it’s delivered matters enormously too.

This is clearly a principle Simon Ruddick, chairman of alternative investment consultant Albourne, understands well. Elaborate costumes, theatrical performances and themed receptions formed the backdrop for unveiling the firm’s second Investor Manifesto (IMII).

The document, released during Albourne’s annual meeting in London, contains 50 proposals designed to improve the alternative asset management industry for the benefit of investors and fund managers.

The manifesto is a bold undertaking. Indeed, Ruddick has stepped down from Albourne’s executive committee to focus on championing the initiative, though he remains in his role as company chairman.

Given the number of proposals on the table, Albourne doesn’t necessarily anticipate being able to deliver all of them. “Our heart is enthusiastically willing to try and pursue all 50; our head will respond to the subset of proposals that our clients feel most strongly about,” says Ruddick.

Albourne intends to spend the next 12 months carrying out further consultations on the proposals. It will begin implementing the measures its clients have elected to co-champion after its next annual meeting in Philadelphia.

From there, Albourne anticipates it will take a minimum of four years’ worth of work to deliver its most popular manifesto items.

“This is not a sprint, or a marathon, it’s a marathon of marathons,” states Ruddick.

The manifesto has lofty intentions, but it contains a sprinkling of fun too. It is organised into ‘mini-mii’ sections in a nod to the Austin Powers theme of the 2018 Albourne meeting (which was named Investin’ Powers: Yeah Baby).

Albourne says the lessons it has learned from previous campaigns will inform its approach to this one. The firm, whose clients have more than $450bn invested in alternative assets, is conscious that it is sometimes perceived as using the ‘stick’ of capital in its dealings with managers. This time around it’s making sure to offer some ‘carrots’ as well.

Fees
One such carrot is the proposal to lobby for a change to the US tax code to make multi-year crystallisation fee structures more feasible. The end goal is to amend IRC §457A to delay manager tax liability on performance fees, then to lobby for similar changes in other jurisdictions.

“We are always looking for win-wins and we think this would be great for the fund manager and for the investor. It’d help the alternatives industry think about long-term alignment rather than short-term profit maximisation,” says Ruddick.

His enthusiasm for the proposal is shared by many, although some executives are sceptical over whether it is a battle the industry can win.

“Albourne is right that this is an issue,” says the COO of a $12bn hedge fund. “It’d be great if they can do it, but governments don’t like giving up taxes so it’s going to be very difficult. And I assume hedge fund managers aren’t at the top of HMRC’s or the IRS’ list of things that need to be addressed.”

Promoting the adoption of alpha-based fees across the industry is another of Albourne’s manifesto proposals. There’s undoubtedly huge demand from investors for fee structures that exclusively reward market-beating returns.

However, Mark Flanagan, a principal at Aon responsible for Emea ODD, makes the point that separating alpha from beta is far from straightforward.

“For certain hedge fund strategies there isn’t an obvious benchmark to measure performance against. This is particularly true for strategies that seek to produce uncorrelated returns,” Flanagan argues.

In acknowledgment of this complexity, Albourne is to start by advocating for the adoption of alpha-based models among long-only funds. Only once this effort is underway will it tackle the more complex task of promoting the structure in the long/short space.

Risk
Another metaphorical carrot for hedge funds comes in the form of Albourne’s plan to produce templates for permanent capital structures. There are many fans of the proposal but the COO of one UK-based quant fund critiques it for not addressing the reasons permanent capital structures are yet to gain serious traction in the industry.

“Investors want to be able to get out at NAV but if a manager is trading poorly they have to sell at a discount. That’s why investors don’t like permanent capital and I don’t necessarily see that changing,” he says.

Albourne is also putting forward a series of proposals concerning the regulation of risk. “We want our investors to get involved in the discussion around Basel III and Solvency II,” says Ruddick. “We think both pieces of regulation could, and should, be improved to better catch and convey the risk posed by the firms being monitored.”

While the thrust of this regulatory engagement is broadly welcome, there’s been some pushback against the suggestion that government agencies could be encouraged to use data gathered via ‘Open Protocol’ reports. The COO of a start-up event-driven fund describes the promotion of Open Protocol as Albourne “talking up its own book”.

In response to this criticism, Ruddick says: “Albourne has taken meticulous care to make sure that every single aspect of the Open Protocol has been in the public domain since the very beginning. We have done this knowing that it creates a ‘last mover advantage’ – i.e. that others can use it without the development time that we have had to contribute to its creation. No doubt there will always be some fund managers who project their own myopic self-interest when it comes to assessing the motivation of others.”

Running contrary to claims of self-promotion, Albourne argues many of its proposals are designed to bolster independent industry organisations that protect the interests of investors and managers.

For example, Ruddick suggests the SBAI would be the ideal organisation to administer an identifier database to track securities issued by hedge funds and other industry participants. “It is the perfect way to fund that immaculate, neutral industry body that becomes the agent of change,” he says.

The SBAI is set to discuss the suggestion, along with the others included in IMII, at its next board meeting.

Documentation
The ‘carrots’ in the manifesto aren’t reserved exclusively for asset managers. Far from it, in fact. Ruddick says an idea that’s gained traction among its clients is the move to explore whether it would be possible to stop funds from passing on legal fees when they’ve been found guilty of wrongdoing.

The tightening up of indemnification wording in offering documents could potentially end up saving institutional investors, including pensions and sovereign wealth funds, millions of dollars.

Proposals for reforming industry service providers also include the promotion of a list of model terms for a ‘prime brokerage agreement’ and the establishment of a working group for fund administrators.

Responsible investment
Not all of the suggestions in the responsible investment section of IMII are new. It echoes the European Commission’s call for the creation of a common taxonomy on sustainable investment. It also joins efforts, spearheaded by campaigning organisation the Principles for Responsible Investment, to advocate for the standardisation of corporate-level ESG reporting.

A more idiosyncratic proposal is the suggestion that Albourne could create a philanthropy directory comprising DDQs on charities from fund managers and investors.

The road ahead
Giving his view on the whole manifesto, one hedge fund industry veteran says it contains many sound ideas. However, his concern is that efforts to make the industry more process-driven risk driving it further away from its ‘freewheeling’ roots.

“I joined a hedge fund in the 90s and when investors came in we handed them a spreadsheet with monthly returns and that was it,” the COO reminisces.

But times have changed since those early days and Ruddick argues alternative asset managers need to adapt. Albourne faces a long and arduous road translating the strongest of its initial 50 proposals into reality. Ruddick is nonetheless committed to the mission, aware of what is at stake.

“We want the industry to be as strong as it can be because it plays a very important role in the financial ecosystem,” he says.

Albourne IMII headline proposals
  • Address the taxation of multi-year crystallisation fee structures
  • Increase the adoption of alpha-based fees
  • Use open protocol data for regulatory capital reporting and in the search for systemic risk
  • Help formulate templates for permanent capital structures
  • Create identifier databases for funds, fund managers and investors
  • Increase the effectiveness of private equity LPACs
  • Address the use of subscription lines and borrowing facilities by private market managers
  • Address hedge fund managers’ co-investment policies
  • Recommend the terms of the dynamic beta reporting rulebook
  • Explore the standardisation of corporate-level ESG reporting

Groovy, baby on HFM InvestHedge.


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