Over the span of the last five years, the performance of hedge funds has been nothing but mediocre. This is not entirely surprising considering the fact that most of the flow of assets continues to be focused in a less percentage of firms, with the biggest assets below management. Of these, many firms have transformed into gatherers of asset from primary generators merely because they have managed to handle a much larger number of assets than their strategies can ideally handle.
Based on this fact, it is not surprising to see the results of a study performed by Pertrac that showed that over a period of 16 years, small hedge funds performed far better than large hedge funds in a total of 13 years out of the 16 under study. They were able to do this with an annual compound rate of return for the average small fund of 12.50 percent, in contrast to the large funds of 9.16 percent. Barclay Hedge Fund Index, which weighs all the managers equally, was up by 11.11 percent in 2013. In contrast to this, the Bloomberg Hedge Fund that gives a larger weight to bigger managers was only up by 7.4 percent.
One of the greatest factors resulting in the phenomenon of a large amount of assets flowing towards the biggest managers is the development of the process of investment in hedge funds, especially investment in pension funds. Not only public but also corporate pensions are progressively moving the exposure of their hedge funds away from funds that point towards direct investment in hedge funds, all with the cooperation of an investment consultant. What most consultants recommend are the biggest hedge funds so that the headline risk is reduced for their clients but, more importantly, they recommend this because of the huge amount of assets that they are advising on. The primary requirement of consultants is that they need managers who are willing to make large amounts of asset investments with them so that such funds can ultimately invest in by the entire clientele of the consultant.
The primary duty of investors is to enhance and build up on the research that is provided to them by their hedge fund consultant. They can do this by performing internal research on mid-sized and small-sized managers by themselves. Indeed, this can be a daunting process as there are more than 10,000 hedge funds present. One way to make this process easier is by taking advantage of the helpful resources put forth by various high-class third party marketing firms (3PMs) that are present in the industry. A number of benefits that are offered by 3PMs are as follows:
- The greatest benefit is that 3PM services are free of cost for all investors. Usually the hedge fund organization pays the fees. Additionally, a few of the best 3PMs necessitate their managers to deliver the status of a most favored nation for their joint clients, and also make sure that they get only the best possible terms.
- Evaluation of managers also becomes easier. No investor wants to waste their precious time with those managers who are not able to efficiently communicate what they do. Good third party marketing firms help managers by constantly delivering a sufficient and appropriate marketing message that aids in with the identification of the degree of differences between the advantage across the various factors of evaluation that are used by the investors for the selection of hedge funds.
- Another benefit offered by 3PMs is consulting advice on the various strategies they believe will perform better in the given prevailing economy, and the different levels of assessment. They also help in identifying the trends that they believe to be similar amongst the investors and towards which direction the money is headed.
The reason as to why 3PMs stand at an interesting position is because of the research they perform on various hedge funds that are part of diverse strategies. Also, it is because they are in contact with many investors and talk about the manner in which the allocation of their assets has taken place, including the strategies they are currently emphasizing on.
However, one disadvantage is that the 3PM industry barriers to entry are low, thus leading to substantial reputational and quality differences that are present between the many 3PM firms in the industry. What investors can do is to counter this is to create a basis of differentiation between the firms and focus only on the top ten percent present within the industry.