Key Takeaways
- • Many of the largest and elite hedge funds are absent from commercial databases because they voluntarily report metrics and many are reluctant to share data that could be sold to competitors, distorting institutional assessments.
- • Paul Zummo, CIO of J.P. Morgan Alternative Asset Management, says family offices and sovereign funds, which face fewer rigid investment policy constraints, have been increasingly allocating to hedge funds, while pension funds and traditional institutions have lagged.
- • Zummo argues that flawed hedge fund data feeds into institutional capital market assumptions, and that treating hedge funds as one asset class masks differences among individual strategies and managers.
- • Jon Caplis, CEO of PivotalPath, says PivotalPath's Relative Value Index generated annualized returns of about 9% and alpha of about 6.5% per year over three years, across roughly 200 funds with $600 billion in assets.
Summary
A podcast episode of Institutional Investor's "In Conversation with Julie Segal," recorded live at the Allocators' Choice Awards Roundtable in late September, examines whether hedge funds justify their fees. The episode features Paul Zummo, CIO of J.P. Morgan Alternative Asset Management, and Jon Caplis, CEO of hedge fund research firm PivotalPath. According to the discussion, a significant share of the largest and most elite hedge funds are missing from the databases many institutions rely on, because hedge funds voluntarily report their metrics to commercial databases and many are reluctant to share information that may be sold to competitors.
Zummo said family offices and sovereign funds, which are less bound by rigid investment policies, have increasingly allocated to hedge funds over the past few years. These investors have been raising expected returns and alpha, and lowering volatility and correlation with markets, in their asset allocation models. Pension funds and other traditional institutions have lagged, operating with less flexibility and relying on what Zummo characterized as flawed hedge fund data in their capital market assumptions. Zummo also argued that investors wrongly treat hedge funds as a single asset class, relying on aggregated industry figures that obscure performance at the strategy and manager level.
Caplis noted that manager labels carry less meaning than they once did, as macro managers build equity books, quant managers develop fundamental research, and multi-strategy funds have become some of the largest allocators to outside managers. He identified the growing use of separately managed accounts as a major trend to watch. On the core question, Caplis cited PivotalPath's Relative Value Index, which focuses on strategies designed to be uncorrelated with the market. Over the last three years, the index generated annualized returns of about 9% and alpha of about 6.5% per year, covering roughly 200 funds with $600 billion in assets. Caplis said investors can therefore use a 6.5% alpha in models rather than the zero many have long assumed, calling it "the difference between being in hedge funds, and not being in hedge funds."
Zummo said family offices and sovereign funds, which are less bound by rigid investment policies, have increasingly allocated to hedge funds over the past few years. These investors have been raising expected returns and alpha, and lowering volatility and correlation with markets, in their asset allocation models. Pension funds and other traditional institutions have lagged, operating with less flexibility and relying on what Zummo characterized as flawed hedge fund data in their capital market assumptions. Zummo also argued that investors wrongly treat hedge funds as a single asset class, relying on aggregated industry figures that obscure performance at the strategy and manager level.
Caplis noted that manager labels carry less meaning than they once did, as macro managers build equity books, quant managers develop fundamental research, and multi-strategy funds have become some of the largest allocators to outside managers. He identified the growing use of separately managed accounts as a major trend to watch. On the core question, Caplis cited PivotalPath's Relative Value Index, which focuses on strategies designed to be uncorrelated with the market. Over the last three years, the index generated annualized returns of about 9% and alpha of about 6.5% per year, covering roughly 200 funds with $600 billion in assets. Caplis said investors can therefore use a 6.5% alpha in models rather than the zero many have long assumed, calling it "the difference between being in hedge funds, and not being in hedge funds."
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